-;5f;-^"*ff _-,^:'s-;, *-s--^.;^;^ 







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Revlaed April 10, 1B22. 

U. S. DEPARTMENT OF AGRICULTURE, 

FOREST SERVICE. 
W. B. GREELEY, Forester. 



INSTRUCTIONS FOR APPRAISINU 

STUMPAGE ON NATIONAL 

FORESTS. 




WASHIKQTON: 

GOVERNMENT PRINTING OmOB. 

1922. 



Revised April 10, 1922. 

U. S. DEPARTMENT OF AGRICULTURE, 

y*' '-FOREST SERVICE. 

W. B. GREELEY, Forester. 



INSTRUCTIONS FOR APPRAISING 

STUMPAGE ON NATIONAL 

FORESTS. 




WASHINGTON: 

GOVERNMENT PRINTING OFFICE. 

1922. 






'V 



LIBfWRY OF CONGf^ESS 

RECEIVED 

•JUN;281922 

DOCUMENTS D!Vi3<0: 



CONTENTS. 



Page. 

Introduction . ^ 1 

Purpose of instructions 1 

Use of instructions 1 

Standard terms 1 

Fixed investment 1 

Depreciation 1 

Residual and wrecliing values 2 

(Operating costs 2 

Maintenance 2 

General expense 2 

Interest 2 

Working capital 3 

Selling price 3 

Profit - 3 

Overrun 3 

Overturn, or cost of production 3 

Principles underlying stumpage appraisals 4 

Basis of appraisals 4 

Marlvet value required by law 4 

Appraisals on agricultural lands 4 

^Miniunini stumpage rates 4 

Appraised value 4 

Fair profit for the operator 4 

Intensive study of investments and costs 5 

Grouping and standardising operating costs 5 

Conservative calculations 5 

Description of logging conditions and methods 6 

Use of appraiser's judgment 6 

Analysis of a proposed operation 6 

Fixed investment, depreciation, and residual or wrecking value S 

Inclusion of all necessary investments 8 

Commissaries and boarding houses 8 

JMill sites and rights of way 9 

Size and type of plants : 9 

Borrowed and unborrowed capital 9 

Classification of investments 9 

Investments for remanufacturing plants excluded 10 

Depreciation of fixed investments 11 

Kate of depreciation 11 

Calculation of depreciation 11 

Physical life 'of equipment and structures 12 

Determination of residual or wrecking value 13 

Timber upon which investments should be depreciated 13 

If no additional timber is available 14 

If additional timber is available 14 

III 



IV CONTENTS. 

Principles underlying stumpage appraisals — Continued. Page. 
Fixed investment, depreciation, etc. — Continued. 

Use of standard manufacturing costs and depreciation 15 

Profit-bearing period of investments fixed by actual use 15 

Interest charges on preliminary investments 16 

Calculation of annual depreciation and average investment 16 

By separate years 16 

By investment items 16 

Operating costs 20 

Standard classification 20 

Necessity for ascertaining all operating costs 22 

Use of conservative figures 22 

Checks from jobbing rates and going operations 22 

Extra costs of Service requirements 22 

Basis of computation 2.3 

Distinction between operating costs and fixed investments 23 

Period of use the deciding factor 23 

Maintenance 23 

Maintenance of mills 23 

Selling costs 24 

'■ Taxes and insurance 24 

General expense — Superintendence 24 

Working capital 24 

Elements in working capital 24 

Variation in different operations 25 

Frequency of the turn 25 

Working capital required for taxes and insurance 25 

Working capital required for accounts receivable 25 

Determination of working capital 20 

Margin for contingencies 27 

In slow operations 27 

Calculation of working capital from average stocks on hand 27 

Use of normal rather than speculative stocks 28 

Working capital in sales of special products 28 

Overrun 29 

Source of overrun 29 

A necessary factor in stumpage appraisals 29 

Determination of overrun 29 

Log scale the final basis in calculations 29 

Lumber and log selling prices ,30 

Appraisals based upon lumber selling prices I 30 

Average selling price of various grades ^ .30 

Calculation of the average selling price 30 

Average selling price of mixed stands 31 

Lumber prices prevailing in producing regions 31 

Lumber prices during normal market conditions 31 

State of manfacture and shipment 31 

Value of by-products 32 

Prices of other products than lumber 32 

Use of log prices as a check 32 

Margin for profit and risk 32 

What profit is 32 

Profit margin in stumpage appraisals 32 



CONTENTS. 



Principles underlying stumpage appraisals— Contimied. 
Margin for profit and risk — Continued. 

Elements in margin for profit and risk 

Interest on investment 

Reward for personal effort 

Business risks 

Risk on fixed investments and working capital 

Other factors affecting risk 

Comparison with other kinds of business 

Comparison with private operations 

Methods of reckoning margin for profit and risk 

Investment method 

Overturn method 

Compensation for personal services 

Checks on profit margin calculations 

By going operations 

By current bids 

By money per thousand feet 

Application of the investment method 

Frequency of the turn unimportant 

Calculation under the investment method 

Rates of profit margin under the investment method 

Different rates on different parts of the investment 

Interest on borrowed capital 

Application of the overturn method 

Effect of fixed investments 

Bearing of frequency of the turn on profit margin 

When used 

Different rates on logging and milling 

Use of both the investment and the overturn methods in same 

appraisal 

Rates of profit margin under the overturn method 

Distribution of profit margin and depreciation in mixed stands 

Prorated on quantity of timber 

Prorated on net value of timber 

Stumpage price 

How obtained in mixed stands 

Flat rates not desirable 

Use of minimum stumpage rates 

Distribution of loss on inferior species 

Trade valuation of inferior species 

Stumpage prices for special products 

Appraisals for small sales 

Small operations irregular 

Appraisals based on methods in use ^ — 

Lumber prices 

Small operations competing in general markets 

Schedules of prices for small sales 

Safeguards and checks 

Check by appraisei"'s judgment 

Check by money margin per 1,000 feet 

Prices bid in former sales 

Current stumpage appraisals 

Prices of private timber 



Page. 

33 
33 
33 
33 
34 
34 
34 
35 
35 
35 
35 
36 
36 
36 
36 
36 
37 
37 
37 
38 
38 
39 
39 
39 
40 
40 
40 

41 
41 
42 
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42 
43 
43 
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44 
44 
44 
45 
45 
45 
45 
45 
45 
46 
46 
46 
46 
46 
46 
46 



VI CONTENTS. 



Page. 



Methods of appraising stumpage; application of principles previously 

discussed , -= 47 

Symbols for elements in appraisal 47 

Examples of the investment method 47 

A small operation in the Rocky Mountains 47 

A middle-sized operation in the Blue Mountains 50 

A large operation in the Idaho Panhandle 54 

Examples of the overturn method ^ 60 

A small hardwood operation in the southern Appalachians 60 

A logger's sale in northern Montana 62 

A sale of tie and mining timber in Wyoming 65 

An example of the investment method for logging and of the overturn 

method for milling 69 

A flume and driving chance in the western white pine region 69 

Appendix — Form for summarizing the essential data in stumpage ap- 
praisals 73 



INSTRUCTIONS FOR APPRAISING STUMP AGE ON 
NATIONAL FORESTS. 



INTRODUCTION. 

Purpose of Instructions. 

These instructions are meant to standardize the principles and methods fol- 
lowed in stumpage appraisals upon National Forests. They bring together the 
results of the experience and study of many Forest officers, but are not final, 
and will be revised from time to time as further experience is gained. They 
should, however, be applied in all appraisals, both (1) to .secure uniform 
practice throughout the Forest Service and (2) to develop this phase of sales 
work by joint use and study of the same methods. One of the methods indi- 
cated will therefore be used in every stumpage appraisal. Other methods 
may be used, as desired by the appraising officer, and the results reported as 
a check upon the standard methods. Suggestions for modifications or addi- 
tions to these instructions should be submitted to the Forester. 

Use of Instructions. 

These instructions supplement the National Forest Manual. They will govern 
the appraisal of stumpage in timber sale, timber settlement, timber trespass, 
and free use business, and in land exchange projects. 

If copies are desired by others than members of the Forest Service, the 
opportunity to purchase from the Superintendent of Documents, Government 
Printing Office, Washington, D. C, shoiild be pointed out. 

STANDARD TERMS. 

For uniformity in appraisal reports and discussions the following terms will 
be used with the meanings here given : 

Fixed Investment. 

Fixed investment, as applied to lumbering operations, is the money expended 
rii constructing or acquiring tlie operating plant. It comprises not merely 
buildings, railroads, and woods improvements, but machinery and equipment, 
such as cars and locomotives, donkey engines, and teams. It includes the re- 
placement of worn-out structures or equipment which must be renewed during 
an operation. Fixed investment, as distinct from working capital, is the outlay 
for land, structures, and equipment, which can be recovered only in a consider- 
able period of time as portions of the cost of the plant are returned from the 
business and charged off in its accounts. ■" 

An initial fixed investment is the expenditure for these purposes required at 
the beginning of an operation, to start production at the normal capacity of 
the plant. A subsequent fixed investment is any later outlay for the extension 
or renewal of improvements or equipment. 
Depreciation. 

Shrinkage in the value of fixed investment is called depreciation. At the 
end of an operation the buildings, transportation improvements, and equipment 
are valueless or worth but a portion of their first cost. Depreciation is this 

1 



2 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

decrease in the value of fixed investments which must, in one form or another, 
be restored to the original capital from the proceeds of the business. 

Residual and Wrecking Values. ^ 

Fixed investments usually have some value at the end of an operation. If 
this value exists because of opportunity for continued use in place, as v^rhere 
additional blocks of timber are available to a partly used mill, it is known as 
residual value. If the value is only for removal and use elsewhere, or for sale 
as scrap, it is known as tcrecMng value. 

Residual or wrecking value is equivalent to first cost less depreciation. As the 
amount of depreciation is decreased, residual value approaches the original 
investment and may nearly equal it in the case of railroads and other permanent 
structures. Investments in the lumber business, however, are seldom main- 
tained at a constant capital value, as is frequently the case in industries of a 
more permanent character. 

Operating Costs. 

Operating costs consists of all expenditures in an operation except for stump- 
age and fixed investments. They are the current charges for labor, supplies, 
and other expenditures required in logging and manufacturing, from stump to 
car. They include maintenance, taxes, insurance, and general expense. 

Maintenance. 

Maintenance includes all charges for keeping buildings, structures, machinery, 
and tools in condition for doing the work for which they were designed. It is 
a current operating cost, consisting of labor, materials, and new parts of equip- 
ment used in repairs. Unlike depreciation, maintenance bears no direct relation 
to the cost of fixed investments. 

No arbitrary line need be drawn between maintenance and fixed investments 
in the matter of replacements. The replacement of complete units like boilers, 
burners, dry kilns, engines, band mills, planing machines, locomotives, or donkey 
engines should be regarded as a subsequent fixed investment. The replacement 
of small parts of mill machinery such as band saws, belts, pulleys, etc., should 
be regarded as maintenance. The replacements of short-lived equipment, such 
as steel cables, saws, wedges, and axes are ordinarily carried as a current operat- 
ing cost, but may be treated as an investment. Sound local trade practice 
should guide the treatment of these items in National Forest appraisals. 

General Expense. 

General expense is a convenient term to designate the operating costs whicii 
are not directly chargeable to any distinct and recognized step in logging oi: 
manufacture. It includes supervision of the operation as a whole, office ex- 
penses, etc. It does not include taxes and insurance, which are sufficiently 
specific to be treated separately. 

The term overhead charges is frequently used in the trade to designate ex- 
penditures of this character. General expense is preferred as a more applicable 
term. 

Interest. 

As used in Forest Service appraisals, interest is neither one of the regular 
costs nor a part of the returns from the business. Interest on invested capital 
at any fixed rate will not be included in the cost of production, and all returns 
will be shown in one place as margin for profit and risk. The term interest wiU 
be used only to mean interest on money invested in improvements during the 
period before cutting begins, which will be made part of the fixed investment 
as computed on the date when logging commences. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 3 

Working Capital. 

Working capital is the mdney which must be available to pay for stumpage, 
labor, supplies, insurance, and other current expenditures in the operation. It 
includes the operating costs, but excludes any sums expended for fixed invest- 
ments. Working capital may be regarded as a fund drawn upon from time to 
time for operating costs and maintained by restoring to it a portion of the 
receipts from the sale of the product. 

Selling Price. 

Selling price is the average mill-run value of the product of an operation per 
thousand board feet or other unit. In lumber production it is the average in- 
voice price of the various grades manufactured f. o. b. cars at the mill or 
nearest common-carrier shipping point. With other products, it is the average 
price of all grades and sizes at the point, usually represented by common- 
carrier shipment, where the specific operation dealt with in the appraisal ter- 
minates. Selling price should ordinarily be taken as the average price at which 
the product is billed less actual freight, or scheduled freights with under- 
weights adjusted. If the prevailing practice in the region is to discount for 
cash payment, the selling price should be reduced accordingly on that portion 
of the product subject to discount, and the working capital should be deter- 
mined with recognition of the shorter average elapsed time between shipments 
and payments. 

The average selling price of a species or a tract of timber is the average price 
of all grades and sizes of the manufactured product. This product may include 
a considerable variety of form and finish. As a standard practice, factory 
products and the higher forms of finish will not be included unless necessary 
to arrive at a satisfactory valuation. 

Profit. 

Profit is the money returned from sales of the product over and above depre- 
ciation of fixed investments, operating costs, and payments for stumpage. 
Profit must be distinguished from a margin for profit and risk. The latter is 
the profit element used in Service appraisals. Aside from the actual profit 
estimated as due the operator, it includes a surplus to cover unforeseen losses 
and risks. The margin for profit and risk may be calculated as a percentage 
return on the money invested, a given amount per unit manufactured, or a 
percentage of the total unit cost of production. 

Overrun. 

Overrun is the difference between log scale and lumber tally at date of sale, 
on the same quantity of material in the log. It results from the inaccuracies 
of log scales, and particularly the use of thinner saws since the prevailing scale 
rules were devised, from closer utilization of short lengths and narrow widths, 
from cutting dimension stock instead of inch boards, and other features of 
manufacture. Overrun is computed as a percentage increase on the log scale, 
an overrun of 10 per cent meaning that 1,000 feet log scale will cut 1,100 feet 
of lumber. 

Overturn, or Cost of Production. 

The overturn is the total production cost of each thousand board feet log 
scale or other unit. It includes depreciation and all operating costs. Over- 
turn plus margin for profit and risk plus stumpage price equals the selling 
price of the manufactured product. 

86001—22 2 



4 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

PRINCIPLES UNDERLYING STUMPAGE APPRAISALS. 
BASIS OF APPRAISALS. 

Market Value Required by Law. 

The act of June 4, 1897, provides tliat National Forest timber may be sold at 
" not less than the appraised value." In applying this requirement, the aim 
of stumpage appraisals will be to aseertain the existing market value of the 
timber. 

Timber vsdll ordinarily be appraised at the rates indicated for the most valu- 
able products to which it is suited and for which an established market exists. 
Where there is no market f(n- saw, tie, or pole timber, but a local demand exists 
for cordwood or other less valuable products, sales are permitted at stumpage 
prices based upon the ])roducts actually marketable. 

Appraisals on Agricultural Lands. 

The standards and requirements herein outlined are applicable to timber on 
all classes of National Forest lands. On areas which will be listed as chiefly 
valuable for agriculture after the removal of the present stand, as on non- 
agricultural lands, the appraisal will be based upon the specific methods of 
operation suitable for the chance. 
Minimum Stumpage Rates. 

Minimum I'ates'for each species are established by the Forester or district 
forester for every Forest area which has the same general market and manu- 
facturing conditions. They constitute upset prices applicable if appraisal in 
accordance with these instructions does not indicate higher values. 
Appraised Value. 

It is the duty of the appraiser to ascertain the value of the timber under 
the principles outlined in these instructions by a thorough examination and 
calculation. The results thus obtained will constitute the appraisal report and 
form a part of the permanent record. If he believes that this rate is inap- 
plicable and should not be recommended for the minimum for advertisement, 
it is because there ivS some factor which, in his judgment, has not been properly 
taken care of by the calculations. In such cases the appraiser should supple- 
ment the appraisal report by a statement clearly setting forth his reasons for 
reconnnending a different rate. With these data the officer who authorizes the 
advertisement can determine at what rate the timber should be offered for sale. 
This rate then becomes the appraised value of the timber. 

Fair Profit for the Operator. 

Subject to the minimum rates. National Forest stumpage will be regarded as 
worth the estimated selling value of its product less the estimated cost of pro- 
ducing that product and a fair margin for profit and risk to the operator. 
Appraisals should not offer large speculative profits. Operators on National 
Forests must be willing to cut and manufacture stumpage for a fair return, 
representing compensation for time and ability and an industrial rate on the 
capital required, which is protected liy a reasonable margin against unforeseen 
losses. Profit is not guaranteed by the Forest Service; but the basis of all 
appraisals is a margin between cost and selling price under normal industrial 
conditions which will satisfy a prudent operator, his business situation and the 
advantages of buying Government stumpage being considered. 

It must not be overlooked that this margin will probably not be a clear return 
to the operator, A portion of it covers the risks incident to practically every 
lumbering operation. These are the possible and unforeseen losses which can 



APPBAISING STUMPAGE ON NATIONAL FORESTS. 5 

not be provided for in the appraisal, including the large element of chance in 
the lumber market. But a part of the estimated margin will normally be netted 
to the purchaser as actual profit. 

Intensive Study of Investments and Costs. 

National Forest stumpage must not be appraised by adopting current local 
prices, by uniform rates on the same Forest, or by guess work or hasty assump- 
tions. Appraisals should, on the contrary, be based upon intensive study of in- 
vestments, costs, and profits in each specific case. Each chance presents a prob- 
lem in itself. All of its elements must be worked out as fully as practicable, 
in accordance with the appraiser's judgment of the most logical and efficient 
means of exploitation. 

Every necessary outlay of money should be caught up as far as possible and 
given proper weight. It is important not to overlook the less obvious invest- 
ments or costs, such as interest oii preliminary improvements, superintendence, 
and the cost of employing and insuring labor. Equally thorough consideration 
should be given to all sources of income. It must not be assumed that certain 
costs will be offset approximately by certain indefinite returns and hence that 
both can be eliminated from the calculation. The effort of the appraiser should 
be to estimate as accurately as possible all expenditures and returns in the 
specific case before him. 

Exceptions to this rule will be permitted only in the case of small sales on 
parts of Forests having substantially the same conditions, for which schedules 
of stumpage prices have been established by supervisors under authority from 
the District Forester. (See "Schedule of prices for small sales," p. 46.) 
Grouping and Standardizing Operating Costs. 

An analysis of the operating costs on each chance is essentiaF in appraising 
its stumpage. As data on more operations and chances in each region are 
obtained and compared, however, it is often possible to standardize cost items 
or groups of items at figures generally applicable to going conditions in the 
industry, or to local types of logging or milling. These standards should be 
conservative, particularly with regard to fluctuations in operating costs from 
year to year on the same job. When accurately obtained, standard costs for 
specific items, like maintenance of logging equipment, or complete steps, like 
logging to rail or manufacturing, may be used if study of tlie chance indicates 
that they are applicable. Manufacturing costs for mills of each type and capac- 
ity are especially adapted to standardization. In any event standard costs form 
an excellent check on the calculation. 

Conservative Calculations. 

Calculations should be conservative, based upon average rather than maxi- 
mum efficiency in the region. Logging costs ordinarily vary 5 to 15 per cent 
from average figures because of the varying ability of different operators who 
may all be good, practical loggers. As a standard rule, costs should be based 
upon the work of the average operator rather than that of either the most or 
the least efficient. It is also important to allow for the usual fluctuation in 
operating costs from year to year on the same piece of work, by checking costs 
in going operations over several seasons. Conservative calculations are of 
special importance in small sales. (See p. 45.) 

Tentative offers made for the timber, whether higher or lower than the 
appraiser's opinion of its value, should not influence the appraiser in making 
his investigations, calculations of investments, and of costs of operation. Its 
appraised value should be based on average efliciency. average market condi- 
tions, and a reasonable margin for profit and risk. 



6 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

Description of Logging Conditions and Methods. 

It is necessary not only that the appraiser satisfy his own judgment in fixing 
stumpage rates, but also that of the officer who passes upon his findings. To 
this end, a concise description of the controlling topographic, forest, and in- 
dustrial conditions and a brief account of the nietliods of operation proposed 
should be included in appraisal reports. This may be greatly condensed, but 
should include enough to explain and justify the calculations, particularly as 
regards the grade and value of the product and the investment required. 

Use of Appraiser's Judgment. 

It is the business of the appraiser to apply these instructions to the condi- 
tions on the particular chance and report the results obtained. It is fully as 
important, however, that he checli such results by his own judgment and busi- 
ness sense. He should consider fully other factors which ought to be taken 
into account in fixing prices, such as comparison between dilfereut chances or 
rapid deterioration of the timber. He should report definitely what in his 
judgment the prices should be, wholly independent of the calculation under 
these instructions, giving plainly the facts or considerations influencing this 
judgment. (For an extended discussion of this point see " Safeguards and 
checks," p. 46.) 

The same applies to the use of other methods of appraisal which are believed 
to be sounder in principle or more applicable to the case in hand. First carry 
out the prescribed calculation to a definite conclusion. Then, if desired, offset 
against it the results obtained by other methods with the reasons supporting 
them. 

ANALYSIS OF A PROPOSED OPERATION. 

Boundaries and Cut of the Chance. 

The discussion of principles and methods will be facilitated by a bird's-eye 
view of the appraiser's work. After the estimate and topographic map are 
completed, the first steps are to determine the boundaries of the sale area, 
eliminating unmerchantable timber and ground on which logging is imprac- 
ticable; the proportion of each species which can be cut as demonstrated by 
sample marking on the area or under approved methods of marking for the 
forest type; and the estimated cut by species, log grades (if customary), and 
lumber grades if the quality of the timber makes them important. 

In defining the boundaries of the cutting, it is necessary to approximate the 
amount of additional National Forest stumpage which will logically be handle<l 
by the same improvements; and also the private stumpage which is under the 
control of a prospective purchaser or may be obtained by him and which forms 
part of the same chance. These factors directly affect the layout and deprecia- 
tion of fixed investments and may bear upon the timeliness and desirability 
of the sale. 

Most Important Factors. 

The factors whose careful working out is then most essential to an accurate 
appraisal are : 

(1) The quality of the timber and value of its product. 

(2) The investment required, involving a grasp of current lumbering 

methods and equipment and of the topographic layout and plan of 
operation. 

(3) Operating costs. 

In some regions the grade of the product is the single factor of greatest 
importance in appraisals for large sales ; but in other regions, where there is 
no great variation in the quality of the timber, logging investments and costs 
are the most important factors affecting stumpage values. 



APPEAISING STUMPAGE ON NATIONAL FORESTS. 7 

Layout of the Operation. 

It is first necessary to decide upon the general methods of logging which 
should be employed, the size and type of manufacturing plant, if one is re- 
quired, and the size, annual output, and duration of the operation. The loca- 
tion of the main artery of log transportation, whethei- by railroad, drivable 
stream, sleigh road, or flume, then follows ; and the projection of its principal 
feeders, such as logging spurs, chutes, pole and other roads, forming the 
complete system of log transportation. Judging the quality of stumpage and 
a clear grasp of the layout of logging improvements are the most important 
requisites of accurate valuation. 

From the approximate location of landings or banking grounds on the main 
line of transportation or its feeders, the appraiser should block out the chance 
into logging units for which costs from stump to landing need to be computed 
separately on account of ^'ariations in the character of the ground or timber. 

Investments in Logging Improvements. 

The appraiser is now ready to estimate the cost of transportation improve- 
ments from landing to mill and of logging improvements from stump to landing. 
Working these fixed investments out, unit by unit, he should estimate the 
initial outlay required to put the operation under way ; then the additional 
sums which must be expended from time to time as logging is extended into 
additional blocks. He should determine approximately how long each improve- 
ment, whether a spur grade, chute, sleigh road, or splash dam, will be in use. 
On a railroad chance, for example, a certain mileage of steel rails, picked up 
and relaid on spur after spur, may meet the requirements of log transportation 
for a considerable period, requiring additions only as the actual mileage in 
use at the same time must be increased to reach the less accessible timber. This 
represents a stable investment continued with little change throughout the 
operation. On the other hand, the cost of grading a spur and laying track for 
logging out a single gulch may be invested for but two or three years, after 
which the spur is abandoned. There may thus be frequent expansions or con- 
tractions of the investment in woods improvements. 

Residual or Wrecking Values. 

The next requirement for the appraisal is the residual or wrecking value of 
each improvement at the end of its use in the sale; hence the annual rate at 
which the original investment must be depreciated. This leads easily to the 
investment on which profit is due and to the average yearly depreciation. 

Investments in Equipment. 

The determination of fixed investments, residual or wrecking values, and 
yearly depreciation must be repeated for transportation and logging equipment, 
such as rolling stock, donkey engines, teams, and trucks. The first cost of the 
vai'ious items of machinery and apparatus must be ascertained, the rate at 
which they are worn out, and the time when each kind of equipment must be 
increased or can be reduced as the operation is extended over the entire chance. 

Investment in Manufacturing Plant. 

A like computation must be made of investments in land, buildings, and 
equipment for the manufacturing plant where one is required. This is often 
the most permanent part of the enterprise. Its depreciation requires an ap- 
proximation of the additional timber, public or private, which is accessible 
and should contribute to its operating life. 
Determination of Operating Costs. 

The next duty of the appraiser is to estimate the cost of maintaining the 
various parts of the plant in working condition. This is a current operating 



8 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

cost, but from its nature must be considered in connection witli the cbaracter 
and durability of each structure or class of equipment. Tlie calculation is then 
ready for the remaining operating costs, chiefly labor, for logging, transporta- 
tion, and manufacture. These must include any special or additional costs 
arising from contract requirements of the Forest Service, such as brush disposal 
or cutting snags. The calculation should be carried through all details of 
the business, however remote from the woods. General expenses for superin- 
tendence, lumber sales, clerical and other office charges, taxes on improve- 
ments and equipment, on logs in transit and on lumber in the yard, fire insur- 
ance on the portions of the plant and stock of lumber and logs which are 
normally insured by conservative operators, and liability insurance for injuries 
to labor are all items which must be estimated for in operations to which 
they apply. 

Determination of Working Capital. 

With the operating costs before him, the appraiser is in a position to approxi- 
mate the working capital, as distinct from fixed investment, which is required 
to carry the business with its current charges and its periodic returns from sales 
of lumber. This involves particularly an estimate of the yard stock which must 
be carried on hand in the normal course of business, or the average length of 
time during which the costs put into lumber must be carried by the operator 
before he is reimbursed by its sale. 

Lumber Selling Prices and Overrun. 

Finally, the mill-run selling price of each species to be cut must be ascertained, 
together with the value of lath, slabs, and any other by-products whose manufac- 
ture may be practicable. Mill overrun for the class of timber must also be 
determined and, in sales of saw timber, costs throughout the whole operation 
and all returns put in terms of log scale. 

When these estimates are reduced to final terms, the appraiser will have 
before him : 

(1) The amount of money required for the business, in fixed improvej^ients 
and equipment and in working funds. 

(2) The part of this capital which must be depreciated; that is, which is not 
returned in tangible assets of some form at the conclusion of the sale. 

(3) The operating costs, in terms of thousand board feet, log scale, from the 
stump to the sale of lumber, or in terms of the appropriate unit of measure if 
the product is not lumber. 

(4) The value of the lumber and by-products manufactured from the average 
thousand board feet, log scale, of each species, or the corresponding unit of value 
if the product is not lumber. 

FIXED INVESTMENT, DEPRECIATION, AND RESIDUAL OR 
WRECKING VALUE. 

Inclusion of All Necessary Investments. 

All investments which will actually be required in logging and manufacturing 
a body of National Forest stumpage should be estimated as closely as practicable 
in the appraisal. Items should not be omitted or added because of uncertainty 
as to the methods of operation which will be adopted by the purchaser. All 
improvements and equipment necessary, in the judgment of the appraiser, for the 
most logical handling of the stumpage should be included, and no others. 

Commissaries and Boarding Houses. 

Commissaries and boarding houses are usually conducted as independent enter- 
prises, on a separate cost-paying or revenue-producing basis. They seldom form 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 9 

an integral part of lumbering operations. Investments in buildings and equip- 
ment for these purposes which it is practicable to segregate will not ordinarily 
be taken into account in stumpage calculations. They may be included, however, 
if these features of the business are not handled independently. Where there 
is a loss on board, whether at the mill or in the woods, it should be provided 
for in the estimate of operating costs. 

Mill Sites and Rights of Way. 

Expenditures for mill sites and rights of way are legitimate investments and 
should be included in the appraisal. Mill sites may have a speculative value 
apart from what they are worth for manufacturing lumber. This should be 
disregarded as far as possible, and the investment based upon a fair appraisal 
of the land for milling only. Mill sites will not ordinarily be depreciated, as it 
may fairly be assumed that the unimproved ground will have the same value at 
the end of the operation as at its beginning. 

Size and Type of Plants. 

It is the policy of the Forest Service to favor small and medium-sized opera- 
tions as far as practicable. Selection of the size and type of plants and invest- 
ment calculations will be based upon such operations wherever they are practi- 
cable, and also upon methods of logging and manufacture tried out and estab- 
lished in the locality. Within these limitations, the investments taken should 
be based upon the most logical and efficient methods of exploitation. This ap- 
plies to the size, type, and output of sawmills, the character and amount of 
logging equipment, and the nature of logging improvements. If larger opera- 
tions ai-e clearly the most practicable and logical, stumpage prices must be 
appraised accordingly. (See "Appraisals for small sales," p. 45.) 

Borrowed and Unborrowed Capital. 

No distinction should be made between investments of borrowed and unbor- 
rowed capital. For the purpose of stumpage appraisals, capital obtained by 
credit does the same work and is entitled to the same return as capital owned 
l)y the operator. The cost of obtaining capital is one of the elements entering 
into the margin for profit ; and where this cost is high, as in the case of exces- 
sive local interest rates, the margin for profit and risk may properly be in- 
creased. (See p. 39.) 

Classification of Investments. 

The following classification of fixed investments will serve as a general stand- 
ard for the Forest Sei-vice. Not all of the items will be required in every 
appraisal, and further subdivisions may be desirable in the more intensive and 
detailed calculations. The classification should thus be adjusted to fit special 
conditions, while preserving the main headings and their arrangement. 
I. Investment — Logging. 

(1) Logging improvements — Stump to landing — First cost of — 

a. Chutes. 
&. Roads. 

c. Slides. 

d. Landing improvements, or 

e. Other structures used in skidding, hauling, or landing. 

(2) Logging equipment — Stump to landing — First cost of — 

a. Teams. 
&. Sleds. 

c. Big wheels. 

d. Bimimers or go-devils. 

e. Donkey engines or steam skidders. 



10 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

I. Investment — Logging — Continued. 

(2) Logging equipment — Stump to landing — First cost of — Continued. 

f. Trucks, caterpillars, etc. 

g. Steam or horse loaders. 
h. Woods tools, and 

i. Any other logging equipment or appliances. 

(3) Transportation improvements — Landing to mill, or mill to railroad 

shipping point — First cost of — 
c. Railroads, including — 

{a) Spurs and sidings. 

(&) Roundhouses, coal bunkers, tanks, and other perma- 
nent structures. 
1). Flumes. 

c. Stream improvements. 

d. Roads, or 

.e. Other transportation i)npro\ements. 

(4) Transportation equipment — Landing to mill, or mill to shipping 

point — First cost of — 

a. Railroad rolling stock, track tools, etc. 

h. Marine equipment, tugs, bateaux, etc., and driving tools. 

c. Teams, trucks and harness, sleighs, traction engines, gasoline 
trucks, or other equipment, including hand tools, used in 
transporting timber from landing to mill, or mill to shipping 
point. 

(5) Woods camps and other buildings, together with water system. 

(6) Camp equipment — 

a. Kitchen and mess equipment; 

b. Bedding, heating equipment, and camp fittings. 

(7) Repair equipment — Carpenter, blacksmith, and machine shops, etc. 
II. Investment — Manufacturing: 
fl. Site. 
h. Pond and dam ; other site improvements. 

c. Sawmill. 

(a) Building, 
(ft) Equipment, 
(c) Power. 
id) Lath mill, etc. 

d. Finishing plant. 

(a) Building. 

(b) Equipment. 

(c) Power. 

e. Dry kiln. 

f. Waste burner. 

g. Sheds, docks, platforms, pile bottoms. 
li. Office and miscellaneous buildings. 

i. Yard equipment. 

j. Light, fire protection, etc. 

Investments for Remanufacturing Plants Excluded. 

Mill investments will include only site, equipment, and structures necessary 
to place the product at the point where its selling prices are computed. In- 
vestments in remanufacturing plants, such as box factories, will not ordinarily 
be included. Similarly, investments in power-house equipment or the like 
should be adjusted to exclude expenditures primarily to aid in remanufactur- 
ing, (See " State of manufacture and shipment," p. 31.) 



APPRAISING STUMPAGE ON NATIONAL FORESTS. H 

Depreciation of Fixed Inveatments. 

Depreciation is the shrinkage in the value of fixed investments on account of 
reduced utility or worth. Loss of value may be due to ordinary wear and tear, 
physical deterioration, or inadequacy for the current needs of an operation ; or 
to the exhaustion of available timber supplies. In theory depreciation is a 
certain amount paid out of the proceeds of the business each year on the invest- 
ment. The best concrete illustration is a sinking fund withdrawn from the 
proceeds of the business at regular intervals, deposited in a special account, and 
used to pay off bonds as they become due. In stumpage appraisals depreciation 
will be reckoned as if charged off and withdrawn from the business at the end 
of each year. It is a sum, prorated over every thousand feet of timber cut, 
which in the course of the operation pays back the reduction in value of the 
fixed investments. 

Rate of Depreciation. 

The rate of depreciation varies widely with the nature of the investment and 
character of its use. It is controlled by different factors in the case of the two 
main classes of fixed investments, viz, improvements and equipment. 

The rate of depreciation of each structure or improvement depends primarily 
upon the amount of timber which it can profitably be used to log. Its life is 
fixed by the time required to log the stumpage available. If all of the tributary 
timber is taken out during a particular sale, the improvement will have no 
residual value. Other structures favorably located with reference to large 
supplies of timber, like sawmills and logging railroads, may have a very long 
life. Their rate of depreciation will be correspondingly slow. 

Equipment, on the other hand, can be moved from place to place. It includes 
tools, steam Jogging machinery, cables, railroad steel, teams, and rolling stock. 
Its depreciation depends primarily upon its resistance to wear and tear, or the 
length of its ordinary working life. Current industrial experience is the safest 
guide in calculating the depreciation of equipment. The average working life of 
logging teams, for example, is commonly reckoned as 5 years. Steel rails are 
usually rated at a service of 20 years; but their depreciation during the first 
10 years is at a much slower rate than during the second decade. This is on 
account of the market for second-hand rails which have been used but a few 
years. Donkey engines, on the other hand, have a very unstable value after 
any period of use, and must be depreciated more rapidly. The usual life of 
sawmill equipment is put at 15 to 20 years, but can be extended with higher 
charges for maintenance. Ordinarily more data are available on the deprecia- 
tion of logging equipment, such as horses or trucks, than on mill machinery, 
and its depreciation can be more readily determined than the depreciation of 
manufacturing equipment. Obsolescence is a much more important factor in 
the manufacturing plant; machines are often replaced with better and more 
modern ones long before they are worn out. 

Calculation of Depreciation. 

Depreciation is usually reckoned as an annual percentage of the total shrink- 
age in the value of the investment. This is frequently termed " straight line " 
depreciation. A donkey engine with a life of 8 years and no value at the end of 
that time is thus reckoned as depreciating 12^ per cent of its first cost every 
year. A logging chute which can be used three years and will have no value 
thereafter will necessarily be depreciated 33J per cent annually. A sawmill 
costing $30,000, to be run for 10 years and valued at $10,000 at the end of that 
period, will depreciate 10 per cent of the difference annually, or $2,000. 
86001—22 3 



12 



APPRAISING STUMPAGE ON NATIONAL POKESTS. 



The standard method followed in Forest Service appraisals will be to deter- 
mine : 

(1) The shrinkage in each item of investment from first cost to residual or 
wrecking value at the end of the operation, or whenever it goes out of use. 

(2) The annual depreciation — that is, the total shrinkage divided by the 
number of years in the operation. If an investment is in use but part of an 
operation, its depreciation is thus averaged for simplicity over the whole period 
instead of the years of actual service only. 

(3) The depreciation charge per thousand board feet log scale, or other unit, 
found by dividing the annual depreciation by the yearly cut. Depreciation will 
always be prorated on log scale rather than mill tally. The same result is se- 
cured by dividing the total depreciation of the investment by the entire esti- 
mated cut. 

Depreciation may, as conditions require, be figured on two bases — (1) the 
physical life of the plant and (2) the economic life of the plant. 

The physical life of a plant is the number of years that it will do efficient 
work. The economic life is determined by dividing the amount of timber avail- 
able by the expected annual cut. This is useful as a basis for calculation only 
if the economic life is shorter than the physical life. If a sawmill is so located 
that only a limited amount of timber is available, its useful life Is limited to 
the time required to manufacture that timber. If this period is shorter than 
the physical life, depreciation should be computed on the basis of the economic 
life. The mill machinery, however, would have a wrecking value. 

In appraisals which involve estimating the cost of new manufacturing 
plants, the type and size of mill and, consequently, its cost must bear a prac- 
tical relation to the amount of timber available. A mill site with 1.000,000,000 
feet board measure tributary to it might justify a manufacturing investment 
of $500,000 or more, but a similar milling investment for 200.000.000 feet board 
measure would give an unreasonable depreciation charge against the timber. 

Physical life of equipment and structures. — The following table will serve 
as a guide in figuring depreciation in logging and milling operations. Different 
values may be used in localities where experience has shown that the values 
given in the table are not applicable. Depreciation on some investments will 
vary considerably in different regions. For example, horses can not ordinarily 
be profitably used longer than four years in a rough region, but in a smooth 
region horses may be used five years or longer. The length of the logging 
season also has an effect. The conditions in specific cases may indicate the 
use of wrecking values different from those given in the table. For example, 
lumber sheds and warehouses often have a considerable wrecking value if they 
are within or close to permanent towns. 



Item, 



Reasonable physical life. 



Reasonable wreck- 
ing value. 



Auto trucks 

Box and door factories 

Blacksmith outfit 

Big wheels 

Cables, steel, mainlines 

Cables, steel, back or supported lines. . 
Camp equipment, bedding staves, etc. 

Camps, permanent 

Camps, portable 

Camps, car 

Cookhouse equipment 

Chutes 

I>utch ovens 

Dams 

Dry kilns 

Fire-protective system 



3 to 4 years 

15 to 20 years 

4 to 5 years 

3 to 5 years 

i to 1 year 

i to 2 years 

3 to 5 years 

Period to be in use. 

7 to 10 years 

10 to 12 years 

3 to 5 years 

Period to be in use. 

do 

do 

15 to 20 years 

do 



10 to 20 per cent 

Do. 
Negligible. 

Do. 

Do. 

Do. 

Do. 

Do. 

Do. 
10 to 20 per cent. 
Negligible. 

Do. 

Do. 

Do. 

Do. 

Do. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



13 



Item. 



Flumes 

Furniture and fixtures 

Gasoline saws, etc 

Hammers, cant hooks, etc 

Horses and harness 

Locomotive cranes and steam shovels. 

Locomotives, rod 

Locomotives, geared 

Log cars, light 

Log cars, heavy, standard 

Limiber sheds and warehouses 

Machine shop 

Plank roads 

Planing mills 

Pond improvements 

Power plant (not hydroelectric) 

Railroad steel, 56 pounds or heavier. . . 

Railroad steel, light 

Railroad buildings 

Rail yard systems 

Railroad grades 

Refuse burners 

Sawmills, permanent 

Sawmills, small portable 

Saws, axes, wedges, etc 

Steam loaders 

Steam skidders 

Stream improvements 

Telephone and lighting systems 

Tote or freight roads 

Tractors 

Wagons, trucks, etc 

Water and sewer system 

Yard improvements and equipment. . 



Reasonable physical life. 



Period to be in use. . 

10 years 

4 to 5 years 

1 to 2 years 

4 to 6 years 

10 to 15 years 

15 to 20 years 

10 to 15 years 

8 to 10 years 

10 to 12 years 

15 to 20 years 

do 

Period to be in use.. 

15 to 20 years 

do 

do 

do 

12 to 15 years 

Period to be in use. . 
15 to 20 years....... 

Period to be in use. . 

10 to 15 years 

15 to 20 years 

s to 12 years 

3 to 6 months 

10 to 12 years 

5 to 10 years 

Periods to be in use. 

15 to 20 years 

Period to be in use. . 

4 to 5 years 

3 to 5 years 

15 to 20 years 

7 to 10 years 



Reasonable wreck- 
ing value. 



Negligible. 

Do. 

Do. 

Do. 
10 to 20 per cent. 

Do. 

Do. 

Do. 
Negligible. 
10 to 15 per cent. 
Negligible. 
10 to 20 per cent. 
Negligible. 
10 to 20 per cent. 
Negligible. 

Do. 
20 per cent. 
15 to 20 per cent. 
Negligible. 
5 to 10 per cent. 
Negligible. 

Do. 
10 to 20 per cent. 

Do. 
Negligible. 
10 to 15 per cent. 

Do. 
Negligible. 

Do. 

Do. 
10 per cent. 
Negligible. 

Do. 

Do 



Determination of residual or wrecking value. — Residual or wrecking value is 
an uncertain factor. It should be used only where such a value will unques- 
tionably exist at the end of the operation or sale contract. If no additional 
timber can be handled by the plant, it is obvious that a wrecliing value only will 
remain. Railroads which will become common carriers with permanent traffic 
other than timber form an exception to this rule. Railroad investments under 
such conditions should not ordinarily be considered as logging investments. If 
it is required that the road become a common carrier, a reasonable freight rate 
should be allowed in the appraisal instead of including the road as an invest- 
ment. The rate should be conservative and should correspond with rates estab- 
lished on branch lines where the operating and traffic conditions are similar. 
This rate must be equitable in consideration of the investment and operating 
conditions. However, in cases where railroads have to become common carriers 
in order to secure rights of way, but it is evident that there will not be sufficient 
traffic to maintain them permanently as common carriers, they should be con- 
sidered as investments. The investment in this case should be prorated over 
all traffic which the road will handle during the operating period. 

Wrecking values, determined in accordance with the above table, often 
have a small effect on the calculated stumpage value. In many cases the 
reduction in depreciation by their inclusion will be practically offset by the 
increase in the average profit-bearing investment. 

Timber upon Which Investments Should Be Depreciated. 

A logging chance or natural operating unit, whether all National Forest 
timber or largely privately owned, should usually be considered as one unit of 
operation in arriving at the average investment and the average annual depreci- 
tion. 

As far as practicable, it is the policy of the Forest Service to base depreciation 
upon the full operating life of the structure or equipment as fixed by normal 



14 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

industrial standards. Many timber sales are made for short periods which 
represent but a part of the efficient life of the mill, railroad, or other improve- 
ments. Future sales to such plants can not be guaranteed. The operator must 
protect himself in competition with other bidders for remaining blocks of stump- 
age tributary to his improvements. It is, however, the policy of the Forest 
Service to reserve from sale additional bodies of timber tributary to plants con- 
structed in connection with short-term contracts until the initial chance is cut 
out. As far as practicable such reservations will be sufficient to insure the 
plant a normal operating life. Where additional National Forest timber is 
available, whether specifically reserved by the terms of sale or not, it should 
bear a proportionate part of the total depreciation of the plant. 

Private timber which it is reasonable to believe the operator will handle and 
so located as to be most logically and economically logged by the same set of 
improvements should also carry its proportionate part of the total depreciation. 
This will hold whether the operation is chiefly in private timber, the purchase 
of small tracts of Government stumpage being a secondary feature, or whether 
a National Forest sale forms its principal supply and small quantities of private 
timber are available which it is reasonable to suppose the operator can secure. 
The bearing of private stumpage upon the depreciation of investments must 
therefore be carefully weighed. 

If new mills or other improvements are to be constructed, a reasonable life in 
accordance with prevailing industrial standards will be allowed where sufficient 
Government timber, or private timber which there is reasonable likelihood of 
obtaining, is available. The total depreciation of improvements which can be 
used in logging and manufacturing such additional timber will be distributed 
over the entire amount of stumpage thus roughly blocked out to obtain the 
depreciation charge per thousand board feet. 

If no additional timber is available. — If no additional timber is available, the 
relation of the equipment to the amount of timber to be logged or manufactured 
must be considered, including any special factors, such as temporary main-line 
transportation. (See p. 12.) After deciding what kinds of equipment or im- 
provements are justifiable under the circumstances, investments in railroad 
steel, locomotives, donkey engines, portable or semiportable mills, etc., which 
are usually sold or moved to a new location, should be depreciated on the basis 
of their actual wrecking or sale value at the termination of the operation. The 
average investment should be determined with full recognition of this wrecking 
value. 

If additional timber is available. — If additional bodies of tunber are available, 
the average investment, annual depreciation, and residual value should be de- 
termined for the entire operation instead of figuring the residual value and the 
average investment separately for each block of timber or operating period. 
To illustrate: 

A mill is to be built costing $90,000. Thei-e is sufficient timber available for a 
15-year operation at an annual capacity, of 20,000,000 feet. The estimated 
value of the site and wrecking value of the machinery at the end of the 15-year 
period is $15,000. The total depreciation is $75,000, making an annual depre- 
ciation of $5,000. The National Forest timber consists of 20,000,000 feet so 
located that it should be cut first. This will supply the mill one year. If the 
remaining timber is disregarded, the computation of the average investment, 
using the formula given on page 17. would be 

$90,000+$.5,000+$85.000 =^qo^^ ^,.^,^g^ investment. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 15 

If tiie National Forest timber was so located that it should be cut during the 

last year of the operation, the results would be: 

$20.000+$5,0OO-f-$15,00O „„ 

^^^^"2 — — =$20,000 average investment. 

If the entire tract was National Forest timber and was included in one sale, 

the results would be as follows : 

$90,000+$5,000+$15.000 ,»-.ca/^ . ^ ^ 

- — '- '^ ' — -^ =$55,000 average investment. 

If the average iuA-estment is determined separately for different operating 
periods throughout the life of the plant, there is an unreasonably wide difference 
in the average investment for each period, which is due to the residual value. 
These wide differences would be reflected in the stumpage values. It is reason- 
able, as a rule, to determine the average investment and the average depre- 
ciation for the entire operating period, and as a standard practice this will be 
done in appraisals, under such conditions as are outlined in the examples given, 
particularly with investments in manufacturing plants and railroads. (See 
also " Use of standard manufacturing costs and depreciation," in the following 
paragraph.) 
Use of Standard Manufacturing Costs and Depreciation. 

In regions where it is practicable to standardize manufacturing costs by 
types of mills, the average figures covering the total cost of manufacture, depre- 
ciation included, may be used in appraisals if applicable to the specific timber 
being appraised. Standard manufacturing costs should be collected for differ- 
ent sizes and different types of mills. If these costs are used in appraisals, 
manufacturing investments may be disregarded and a margin for profit and risk 
figured on the standard overturn or total manufacturing costs, including depre- 
ciation. The use of standard costs in this way is especially desirable when 
sales are made to existing plants that have been run a number of years at the 
time of sale. In many, cases these plants were constructed primarily for the 
manufacture of privately owned timber. The original cost may have been 
wiped out by a depreciation charge. There may remain several years' supply of 
National Forest timber. A practicable method of handling appraisals under 
such conditions is to disregard the mill investments and allow a reasonable mar- 
gin on the standard manufacturing costs, including a reasonable depreciation 
burden. (See "Use of both the investment and the overturn methods in same 
appraisal." p. 41. 

Many Forest Service sales consist of small bodies of timber. They represent 
only a small portion of the annual cut of the mills to which the timber goes. 
To estimate the cost of a new mill, or to figure the present residual value of the 
mill that already exists for each one of these sales is often less desirable than 
the use of standard manufacturing costs. 

If several existing plants are possible competitors for a chance, the use of 
standard costs and depreciation is fair to all, and is often more practical than 
to determine an average residual value of the initial investments. 

The standard costs, however, should be checked sufficiently often to make 
certain that they are currently applicable. The margin for profit and risk in 
manufacturing, in money terms per thousand feet of lumber, must be com- 
parable with tha similar margin determined by the use of a reasonable aver- 
age profit-bearing investment. 

Profit-Bearing Period of Investments Fixed by Actual Use. 

Fixed investments are seldom made in one lump at the outset of an operation. 
They usually begin in advance of cutting, depending upon the amount of pre- 



16 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

liminary construction which is required. In operations of any size and lengtli 
additional investments become necessary from time to time, for railroad exten- 
sions, road or chute construction, more logging equipment, and the like. The 
replacement of major items of worn-out equipment, such as teams, rolling stock, 
and steam logging machinery, is an additional fixed investment. (See p. 2.) 
Many investments, furthermore, are used during only a part of the total 
operation. 

Investments are entitled to profit only from the date when they are actually 
made. Also, investments in improvements or equipment which are abandoned 
or worn out before the end of the operation should be cut out of the profit- 
bearing capital at the proper time. Profit on invested money should thus be 
restricted to the period of its actual use. This can be done most conveniently 
by prorating short-term investments over the entire operation in making up 
the average profit-bearing capital. 

Interest Charges on Preliminary Investments. 

Interest should be allowed on money invested in improvements for one or 
more years before cutting begins. The interest which has thus accumulated 
on preliminary investments on the date when their use begins will be treated 
in Service appraisals as an addition to the investment itself. Simple interest at 
the current bank rate will be used. If two years are required for the con- 
struction of improvements before beginning cutting, the amounts to be invested 
each year should be approximated. Interest for two years on the first year's 
expenditures and for one year on those of the second year should be added. 

Calculation of Annual Depreciation and Average Investment. 

Uniform methods of calculating fixed investnients and their depreciation are 
of obvious necessity. To this end, standard forms of tabulation will be of 
service. The essential facts to be determined are (1) the average profit-bearing 
capital at work in the business, and (2) the average annual depreciation of 
the fixed investments. It is of special importance to work out accurately 
the effect upon these two amounts of additional investments in improvements 
or equipment made from time to time and used, during but a portion of the 
operation ; and similarly of the retirement at various intervals of parts of the 
investment which are worn out or whose use is terminated. 

By separate years. — The most exact method is to carry for each year of the 
ope.ration (1) the investment required at the beginning of the year, (2) its de- 
preciation during the year, and (3) additional investments necessary at the 
end of the year. The estimated; depreciation during each year is deducted 
from the investment at its beginning. This figure, with the addition of any new 
outlays required during or at the end of the year, is the investment in the 
business at the beginning of the following year. Thus is obtained the profit- 
bearing capital at the beginning of each year, with the average for the entire 
operation ; the depreciation during each year and for the whole period ; and 
the wrecking or residual value at its end. 

By investment items. — A simpler and quicker method is to calculate for each 
improvement or purchase of equipment the yearly depreciation and the average 
profit-bearing investment, both prorated over the entire operation. Yearly de- 
preciation is determined by dividing the total shrinkage in the value of the 
improvement or equipment by the number of years in the operation. The 
average profit-bearing investment is determined by the following formula : 

One-half of the sum of the initial investment and its residual or wrecking 
value multiplied by a fraction whose numerator is the number of years during 
which the particular improvement or equipment is in use and whose denomina- 



APPKAISING STUMPAGE ON NATIONAL FORESTS. 17 

tor is the total number of years in tlie operation, plus one-half of the j'early 
depreciation. 

This formula may be expressed as follows: 
Let / represent initial cost; 

r the residual value ; 

n the number of years in use ; 

y the number of years planned for the operation ; and 

d the average annual depreciation. 
Then 

I-\-r n d 

equals average fixed investment. 

Wherever depreciation talies place in a straight line — that is, at a uniform 
rate annually during the period of use — this method yields the same results 
as a calculation by separate years. If depreciation does not progress at a 
uniform rate throughout the period of use, it yields a different and usually a 
lower average investment. A uniform rate of depreciation may be fairly 
assumed, however, in practically all logging and milling investments, and 
this is the more common industrial practice. 

The addition of one-half of the annual depreciation in obtaining the average 
profit-bearing capital under each item of investment is based on the assumption 
that depreciation is charged off at the end of each year rather than currently 
during the year. This is equivalent to calculating the average investments as 
at the beginning of each of the respective years in the operation rather than 
at the middle of the year. To illustrate : 

A .$10,000 investment is to be wholly depreciated in 10 years; at $1,000 
annually. The successive investments at the beginning and middle of each 
year are: 



Beginning. 



Middle. 



First year... 
Second year. 
Third year.. 
Tenth year.. 

Total.. 
Average 



$10,000 
9,000 
8,000 
1.000 



$9,500 

8,500 

7,500 

500 



55,000 
5,500 



50,000 
5,000 



An average for the beginning of each year is obtained under the formula by 
taking one-half the sum of the initial investment and residual value 
($10,000-1-0), together with one-half of the annual depreciation, $1,000. The 
addition of one-half of the annual depreciation thus results in a figure repre- 
senting the investment during a 12-month interval in the exact center of the 
operating period, or the true mathematical average. 

This treatment of depreciation is not strictly applicable to all operations. 
It is, however, the more conservative basis of determining average investments 
and will therefore be followed uniformly in Service appraisals. 

The calculation of average depreciation and profit-bearing capital by each 
investment item will be of more general service because of its shorter and 
simpler form than the other method of calculation, by separate years. An 
illustration follows: 

In a 10-year operation, an investment of $10,500 in logging equipment Is 
required for the first year's operation. At the end of the first year, $1,200 
worth of additional equipment must be purchased ; and at the end of the fifth 



18 



APPEAISIISrG STUMPAGE ON NATIONAL FORESTS. 



jear, $1,800 worth must be procured. This completes the logging equipment 
required for the entire 10 years. All of the machinery is depreciated at the 
rate of 10 per cent annually while in actual use. The calculation of the average 
profit-bearing investment in this equipment is as follows : 

Investment and depreciation — Logging equipment. 



Years of use. 


Initial 
invest- 
ment. 


Yearly 
deprecia- 
tion. 


Wrecking 
value. 


Average 
profit- 
bearing 
invest- 
ment. 


10 


$10,500 
1,200 
1,800 


$1,050 
108 
90 




$5, 775 

648 


9 


$120 
900 


5 


720 






Total 


13,500 


1,248 


1,020 


7,143 





The annual depreciation of the first item is one- tenth of the initial invest- 
ment ; of the second, one-tenth of a total shrinkage of $1,080 ; of the third, one- 
tenth of a total shrinkage of $900. 
The average interest-bearing investment under the first item is — 

10 10,500 1.050 
10^ 2+2 



under the second — 



under the third — 



9^ 1.200+120 108 
10^ 2 +2 



5^ 1,800+900 90 
10^ 2 +2 

The estimated cost of roadbed, ties, and laying steel for the fi^st year's 
logging is $4,500. This portion of the railroad will be in use throughout the 
entire operation. Subsequent investments must be made in roadbed, ties, and 
labor for laying rails. There will be no residual or wrecking value for these 
investments. The calculation of the average investment, with the estimated 
period of use of each item, is as follows : 



Years of use. 


Initial 
invest- 
ment. 


Yearlv Average 
"''°- 1 vestment. 


Years of use. 


Initial 
invest- 
ment. 


Yearly 
deprecia- 
tion. 


Average 
profit- 
bearing in 
vestment 


10 


$4,500 
1,800 
1,100 
1,600 
2,100 
1,500 


$450 1 $2,475 
ISO 270 


2 


$2,200 
1,700 
2,500 


$220 
170 
250 


$330 


2 


1 


170 


1 


110 
160 
210 
150 


110 
240 
210 
450 


2 ... 


375 




Total 




1 


19,000 


1,900 


4,630 


5 













The average interest-bearing investment is computed for each item, as 10/10, 
2/10, 1/10, etc., of one-half of the initial outlay, this being a 10-year operation, 
plus one-half of the yearly depreciation. 

The following illustration shows the application of this method to a compli- 
cated railroad investment, parts of which are made and withdrawn at irregular 
intervals : 

A main railroad must be built at the outset of a 20-year operation, at a cost 
of $72,000. Two years will be required for its construction before cutting begins, 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



19 



approximately one-fourth of the amount being expended during the first year 
and three-fourths during the second year. Interest on these amounts at 6 per 
cent ($18,000 for two years and $54,000 for one year) will be included as part 
of the initial investment, which thus aggregates $77,400. It will be fully depre- 
ciated in the 20 years' operation. 

The main railroad suffices for logging during the first two years. Three 
miles of spurs are then required, to be used four years and abandoned. The 
estimated cost is $2,000 per mile for roadbed, ties, and labor and $2,400 per mile 
for steel. Five miles of additional spurs will then be necessary. This will 
necessitate the purchase of steel for 2 miles, at $2,400, and an outlay for road- 
bed, ties, and labor for 5 miles, estimated at $1,800 per mile. These spurs 
are to be used four years, by which time the timber tributary to them will be 
cut out. 

Six miles of spurs into other units must then be graded and laid. The road- 
bed and labor in track laying are estimated at $1,500 per mile. One additional 
mile of steel must be purchased at a cost of $2,400. This section of track will 
supply logs for five years. Extensions aggregating 3 miles must then be pro- 
vided for the last five years' logging, the 6 miles previously constructed remain- 
ing in use. The extensions are estimated to cost $2,000 per mile for roadbed, 
labor, etc., and $2,400 for steel. 

The investments in roadbed will be without value at the end of the operation 
and must therefore be wholly depreciated. All investments in steel rails will be 
depreciated at 5 per cent annually, leaving a wrecking value, for second-hand 
rails, in the case of steel used during but a portion of the operation. 

These investments may be tabulated as follows: 



Years of use. 


Initial in- 
vestment. 


Yearly de- 
preciation. 


Wrecking 
value. 


Average 
profit-bear- 
ing invest- 
ment. 


20 


$77,400 
16,000 
27,200 
19,000 
2 4,800 
19,000 
2 2,400 
16,000 
27,200 


$3, 870 
300 
324 
450 
168 
450 

60 
300 

90 




$40, 635 
750 


4 




18 


$720 


3 726 


4 


1,125 


14 


1,440 


2 268 


10 


2,475 


10 


1,200 


930 


5 


900 


5 


5,400 


1,620 






Total 


129, 000 


6,012 


8,760 


54, 429 





1 Roadbed, etc. 



2 Steel. 



Of the investments made at the beginning of the third year, for example, the 
roadbed is in use four years and the steel 18 years. The average yearly invest- 
ment for this piece of roadbed is therefore computed ass/vX— — I — 9-; for the 



steel as i? 7200+720 324 
steel as ^^x ^ + ^ . 



20^ 2 ' 2 
It is seen that while $129,000 is invested in the 



operation at different times, the average capital at work in the business and 
entitled to profit is $54,429. The entire $129,000 is returned, however, by a 
depreciation charge of $6,012 annually for 20 years and the wrecking value 
of $8,760 at the end of the operation. 

It will be noted that the dates when particular investments are made and 
withdrawn are of no consequence. The telling factor is the number of years 
during which each investment is at work. 
86001—22 -4 



20 APPEAISING STUMPAGE ON NATIONAL FORESTS. 

OPERATING COSTS. 

standard Classification. 

The following classification of operating costs will be used as standard by the 
Forest Service. Not all of its items are applicable in every appraisal and 
further subdivision may be necessary in some instances. The main classifica- 
tion should, however, be uniformly used. 

Classification of operating costs. 

1. Logging. 

(1) Stump to landing. 

a. Felling. 
&. Bucking. 

c. Swamping. 

d. Trimming, peeling, and sniping (included in swamping or yarding 

as case may be). 

e. Skidding or yarding. 

f. Hauling, chuting, reading, etc. 

g. Decking or piling at yards. 

h. Maintenance — supplies and repairs. 
i. Supervision.' 

(2) Landing to mill. 

a. Loading, breaking out landings, or other work at landing itself. 

b. Scaling. 

c. Railroading, hauling, driving, fluming, or other transportation 

charges. 

d. Unloading at mill pond or yard. 

e. Maintenance — supplies and repairs. 

f. Supervision.' 

(3) Extra costs of logging under Forest Service regulations. 

a. Cutting of timber under protection requirements. 

(a) Cost of cutting diseased or weed trees. 

(6) Cost of cutting snags. 
6. Slash disposal. 

(a) Brush piling, or lopping and scattering. 

(&) Burning piled or loose slash. 

(e) Clearing firebreaks. 

(d) Burning slash as cut. 

2. Manufacture, mill pond to f. o. b. cars. 

(1) Sawmill. 

a. Pond, handling logs in pond and putting on jack chain (labor). 

b. Sawing, from log on jack chain until lumber leaves trimmers 

(labor). 

c. Sorting, carrying lumber to transfer chains, buggies or rolls, in- 

cluding grading and tallying (labor). 

d. Power (labor). 

e. Maintenance. 

Supplies. 

Repairs (labor and materials). 

f. Millwright (labor). 

g. Filing (labor). 
h. Oiling (labor). 

^ Use one supervision item for logging all woods work if preferred. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 2] 

2. Manufacture, mill pond to f. o. b. cars — Continued. 

(2) Yard. 

a. Transportation to yard, taking lumber from transfer chains, bug- 

gies, or rolls, or on delivery from kiln or planer, to piles. 

b. Handling, piling, etc., exclusive of loading (labor). 

c. Maintenance. 

Supplies. 

Repairs (labor and materials). 

(3) Kiln. 

a. Transportation to kiln. 

b. Handling (labor). 

c. Power (labor). 

d. Maintenance. 

Supplies. 

Repairs (labor and materials). 

(4) Planing mill. 

a. Transportation to planing mill. 

b. Handling (labor). 

c. Power (labor). 

d. Maintenance. 

Supplies. 

Repairs (labor and materials). 

(5) Sheds.^" 

a. Transportation to sheds. 

b. Handling (labor). 

(6) Loading. 

a. Transportation to cars, including taking down yard piles, repiling 

in cars, etc. 

b. Handling (labor). 

3. Sales. 

(1) Traveling salesmen. 

(2) Commissions. 

(3) Advertisements. 

(4) Retail yards.' 

4. Taxes and insurance. 

(1) Taxes. 

0. On permanent improvements, including franchise taxes. 
&. On movable equipment. 

c. On logs. 

d. On lumber (yard stock). 

(2) Insurance. 

a. On logs. 

b. On lumber. 

c. On permanent improvements. 

d. On equipment. 

e. Liability insurance for injuries to workmen. 

5. General expense. 

(1) Cruising and layout of operation, surveys, etc. 

(2) Protection of sale area from fire. 

2 Include under "Yard" if desirable. 

•'' The operation should be carried through to retail yards only when the organization of 
a specific plant makes this necessary to a proper analysis of costs and returns. As far as 
practicable, returns will be based upon wholesale prices f. o. b. cars at nearest common 
carrier shipping point. (See p. 31.) 



22 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

5. General expense — Continued. 

(3) Office expenses. 

a. Timekeeping. 
6. Clerical help. 

c. Stationery, postage, telegrams, etc. 

d. Rentals, lighting, water rents, telephone service, etc. 

e. Association dues, etc. 

(4) Fees and other expenses in employing labor. 

(5) Supervision: Salaries and expenses of administrative force, including 

foremen whose time is not wholly chargeable to specific operations. 

Necessity for Ascertaining all Operating Costs. 

The chief purpose of this detailed enumeration is to cause appraisers to study 
all features of an operation thoroughly and take all necessary costs into account. 
Caution under this head applies particularly to supervisory costs, selling ex- 
penses, the cost of employing and insuring labor and like items which do not 
appear on the face of current work. Study of running operations is the only 
safe guide to many of these items. Their inclusion in the calculation in accord- 
ance with prevailing industrial conditions and practice is essential to an accurate 
appraisal. 

Use of Conservative Figures. 

Costs should be fairly and liberally reckoned. Men watching going operations 
are inclined to figure too closely, taking standards which are not practicable in 
a season's run and overlooking the delays and losses of close connection which 
occur between constituent portions of the work. The costs used should be prac- 
ticable under continuous operation for a long period. They should check with 
going figures at which operations for a season or more are being conducted by 
reasonably efficient concerns. The aim will be to strike a fair average under 
which the inefficient operator must stand the losses due to his inefficiency, 
while the exceptionally able lumberman will make a higher profit on account of 
his special skill or ability. 

Checks from Jobbing Rates and Going Operations. 

A detailed classification of operating costs should be presented In the ap- 
praiser's report. Checks by sections of the work, such as the cost of loading, 
hauling, and landing logs on a given haul, or the total cost of logging or milling, 
should be obtained from going operations in similar timber wherever possible. 
Current jobbing rates, if available, also serve as useful checks. Any such ra.tes 
or average costs must, of course, be authentic. 

Milling costs tend to be much more uniform over a considerable region and 
much more susceptible of standardization than logging costs. In many manu- 
facturing districts, with well-defined types of mills, average figures may be had 
for the total cost of manufacture and sale, including mill depreciation and main- 
tenance. These are the more trustworthy when embodying the experience of a 
number of operators, and if well established may be substitiited for estimates 
of the same items in stumpage appraisals. Superintendence, selling costs, and 
other general expense items also tend to be the same in plants of the same gen- 
eral size and type and can often be standardized to advantage for considerable 
regions. 

Extra Costs of Service Requirements. 

It is important to give full weight to the added cost of operation due to 
requirements imposed by the Forest Service. These should be estimated sepa- 
rately for items like brush disposal, which are readily segregated from other 
operating costs. The extra cost of other requirements, such as reserving a 
portion of the timber, should be included in the cost of the particular step in 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 23 

the operation to which the requirement applies. In other words, the cost of 
each process should be estimated as the Service will reqnii-e the work to be done. 
The appraiser's report may well contain, however, a summary of the effect of 
all Service requirements upon operating costs and investments for the informa- 
tion of prospective purchasers. ' 

Expenditures under such requirements which are made cairrently in connec- 
tion with other woods operations call for a sum of working capital analogous 
to that for logging costs and having the same turnover. (See p. 25.) Other 
expenditures, particularly brush burning, may be incurred after the logs are 
removed, or indeed after the lumber has been manufactured and sold. Such 
expenditures are paid out of returns for the product and require little or no 
additional working capital. 

Basis of Computation. 

Logging and transportation costs to the mill will be computed on log scale; 
milling costs on lumber tally. This accords with trade practice and facilitates 
allowance for overrun. 

Distinction Between Operating Costs and Fixed Investments. 

Expenditures for temporary improvements, such as chutes or roads in use 
for a year or less, may be charged either as fixed investments or operating 
costs. The difference in the resulting appraisal is unimportant. If classed as 
investments they increase the charges for depreciation and profit on fixed in- 
vestments. If classed as operating costs, they increase this item, together with 
working capital and the profit earned by it. 

To illustrate — $1,000 is to be expended during a logging season for temporary 
truck roads in an operation cutting 5,000,000 feet annually. As an investment, 
this outlay adds 20 cents per thousand feet to the depreciation and 4 cents per 
thousand feet to the profit, figuring the latter at 20 per cent on the inves;ted 
capital. As an operating cost, it adds 20 cents per thousand feet to the current 
charges and 4 cents to the profit on working capital, assuming but one turn 
annually for the expenditure and the same profit rate. 

Period of use the deokUng facior. — The period of use of the structure or- 
material should be the deciding factor. In Forest Service practice all expendi- 
tures for improvements or equipment used for one year or less and having no 
residual or wrecking value will ordinarily be classed as operating costs. Im- 
provements and equipment used for longer periods or which will have a residual 
or wrecking value at the end of the operation will be classed as fixed invest- 
ments. 

Maintenance. 

Maintenance is often confused with depreciation, but should be kept distinct. 
It is a current charge for blacksmith and machine shops, section crews on 
railroads, millwrights, repair kits, supplies, etc., expended solely for the upkeep 
and repair of existing structui-es or equipment. It varies greatly with dif- 
ferent improvements or kinds of equipment, depending upon their nature and 
the amount and severity of use. 

A locomotive, for example, has a first cost of $9,000, a life of 12 years, and an 
estimated scrap value at the end of that time of $600. The depreciation charge 
necessary to restore the original investment is thus $8,400, or $700 a year ; $200 
additional may be required annually, however, for machine-shop work, replace- 
ment of minor parts, etc. The latter is maintenance. 

Maintenance of mills. — Maintenance is always an important and unavoidable 
charge in milling, on account of the constant repairs, alteration of machinery, 
etc., necessary in keeping up an efficient mill. The depreciation of a mill, how- 
ever, where large supplies of timber insure long life, may be very small. Gen- 



24 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

erally speaking, as the depreciation of mills, and other machinery is reduced — 
that is, as a longer operating life is assured — expenditures for maintenance 
must be increased because of the greater average amount of repairs and re- 
placements required. Average maintenance costs for different kinds of im- 
provements and equipment can best be obtained from local experience in 
similar operations. 

Selling Costs. 

Selling costs are specialized and vary with the character of the operation. 
In most small plants the mill cut is either contracted in advance or sold to 
local buyers, selling costs being largely or wholly eliminated. Large plants 
with extensive yard stocks which sell their cut in competitive territory, on the 
other hand, may incur very high selling costs. This charge can be determined 
only from local trade conditions. It can be handled best by establishing aver- 
age selling charges for the principal types of plants in each locality, classified 
by output or by other industrial factors which affect this item. 

Taxes and Insurance. 

Taxes and insurance are grouped apart from general expense to facilitate 
the determination of working capital. Prevailing tax assessments on the 
forms of property carried in a lumber operation, as percentages of their actual 
or sale value, and tax levies on assessed valuation can usually be obtained 
directly from the county authorities. Insurance rates are usually standard- 
ized for the various forms of property — mills, lumber in yards, etc. Local 
practice will be the best index to the proportion of the value of the particular 
class of improvements or other property on which insurance is carried. Lia- 
bility insurance, to cover injuries to workmen, should similarly be estimated 
in accordance with the common practice in this regard. 

Income taxes, either Federal or State, will not be considered as an operating 
cost. Their amount is dependent on the profit realized from the business. 
Their chief influence is on the rate of return on the investment in current 
business undertakings, and therefore, in Forest Service appraisals, on the 
allowed margin for profit and risk. 

General Expense — Superintendence. 

The principal general expense charge is superintendence. The supervision 
of each portion of the work, as logging from stump to landing may be included 
in the cost of that part of the operation. General expense should include only 
superintendence which applies to the entire organization and can not prac- 
ticably be segregated between its parts. 

General expense charges are the least tangible of any in the operation and 
the most easily overlooked. Their inclusion in the calculation is as important, 
however, as the cost of felling or skidding. Careful study of the organization 
of existing opei'ations. the cost of superintendents and other executive oflicers, 
and of necessary office expenses is essential to gauge these items accurately in 
stumpage appraisals. 

WORKING CAPITAL. 

Elements in Working Capital. 

Operating costs are paid either from working capital or directly from the 
proceeds of sales. 

Working capital thus depends upon two elements (1) the amount of current 
expenditures, and (2) the time which elapses between outlay and realization. 
While the amount of such capital actually in use varies from month to month, 
it will for appraisal purposes be regarded as a constant fund fixed in accord- 
ance with the average requirements of the business. This accords with the 
common business practice of carrying short-term notes for periods when spe- 



APPEAISING STUMP AGE ON NATIONAL FORESTS. 25 

cial demands must be met and a corresponding balance when sales are most 
active. Working capital is entitled to regular yearly profit and must be found 
intact at the end of the operation. It is entirely separate from fixed invest- 
ments and has no relation to depreciation. 

Variation in Different Operations. 

The amount of working capital required varies widely in accordance with the 
product of the operation, the methods of marketing it, and the local logging con- 
ditions and trade practices. Uniform methods of calculation are not practicable 
in stumpage appraisals. The following discussion is intended to suggest ways of 
determining working capital rather than to establish hard and fast rules. The 
experience of operators is the best aid in estimating working capital and should 
be obtained whenever possible. 

Frequency of the Turn. 

The factors which bear most directly upon the amount of working capital 
needed in an operation are (1) the total sum of annual operating costs and 
stumpage payments, and (2) the average period between expenditures for these 
purposes and corresponding returns from sales of the product. Broadly speaking, 
the working capital must be equivalent to three-fourths, one-half, or one-third of 
the total expenditures each year for operating costs and stumpage payments if the 
average period between outlay and realization is nine months, six months, or 
four months, respectively. Where an annual log drive is required, working 
capital may be turned but once a year. 

Cases in which the turnover is so rapid that labor and supply bills can be 
paid directly with a portion of the returns, and the working capital is an unim- 
portant item, are usually better appraised by the overturn method. Rarely do 
such cases involve so heavy investments in improvements or equipment as to 
make the investment method the better one to use. (See p. 40.) 

Working: Capital Required for Taxes and Insurance. 

Taxes and insurance become due at specified dates each year and in a con- 
tinuous operation are repaid gradually from sales throughout the year. It is a 
fair assumption, therefore, that a fund of working capital equivalent to one- 
half the yearly taxes and insurance must be kept on hand. 

Workinar Capital Required for Accounts Receivable. 

In ordinary lumber marketing, freight is prepaid by the seller and the account 
carried for 30 or 60 days, or the bill is discounted for cash payment. The 
former practice, which is far more common, requires cash to carry the operation 
until the proceeds of sales are actually in hand and available for use in the busi- 
ness. The latter is a universal trade method of securing immediate returns by 
sacrificing a small portion of them. The discount is thus a means of reducing 
working capital. 

Accounts receivable are often covered by short-term loans. Since no dis- 
tinction is made in Service appraisals between borrowed and unborrowed 
capital, however, and all the funds actually required in the business must be 
provided for, such accounts should be included in the estimate of working 
capital. This item should be figured very conservatively either (1) by in- 
cluding the average period between sale and payment in the " turn " of the 
operating costs and stumpage payments, or (2) by adding to the working 
capital as otherwise made up the average annual amount necessary to carry 
the volume of credit business for a period of one month or more in operations 
of similar type and output, or, where a discounted selling price is used in the 
appraisal, the average annual amount of funds needed, to carry stock from 
time of shipment to payment. 

Since credit accounts are thus provided for in the average profit-bearing in- 
vestment, interest on them will not be included in operating costs. 



26 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



Where the prevailing practice is to discount for casli payment, eliminating 
in whole or in part the need for working capital to cover accounts receivable, 
the discount sliould be shown as a reduction in the average f. o. b. mill price 
actually received ; i. e., the f. o. b. lumber price used in the appraisal should be 
the net price after deducting the prevailing discount from the proportion of 
the business subject to discount. (See " Selling price," p. 3.) 

Determination of Working Capital. 

These principles may be illustrated by the following operation on the West 
Coast. It is estimated that sufficient working capital must be on hand to run 
the logging camp three months and the mill two months before funds are re- 
turned from sales in sufficient amounts to carry the business ; that is, it is neces- 
sary to have a continuous supply of logs equal to the camp's output for one 
month at the landing, in transit, or at the mill, and an average yard stock of 
lumber equal to the output of the mill for two months. Payments for lumber 
will be made in time to carry the cost of the fourth montli's logging and third 
month's milling. The working capital used in logging is thus turned four times 
a year and that used in milling six times, with the excepton of funds carried 
to pay taxes and insurance in each instance, which are reckoned as turning 
twice annually. 

The working capital required in this operation may be summarized as follows : 



Expenditure. 



Depreciation on logging investment 

Taxes and insurance 

Other logging costs 

Sturapage 

Depreciation on milling investment 

Taxes and insurance 

Other milling costs 

Total 



Amount 

per thousand 

feet. 



$0.34 
.09 
4.86 
1.75 
.39 
.16 
3.87 



11.46 



Portion 

paid from 

working 

capital. 



$0.09 
4.86 
1.75 



.16 
3.87 



10.73 



Number of 
times work- 
ing capital 
is turned 
annually. 



Working cap- 
ital required 
per thou- 
sand feet 
annually. 



$0. 045 
1.215 
.437 



.08 
.645 



2.422 



The operation thus needs working capital equivalent to $2,422 per thousand 
feet on its annual cut of 16,000,000, log scale, a total of $38,752. The average 
turn is approximately four and a half times a year, the working capital being 
about 22^ per cent of the sum of annual operating costs and stumpage pay- 
ments, $171,680. 

If market and industrial conditions made it possible to turn the working 
capital used in logging every tv^o months and the nulling capital every month, 
tax and insurance expenditures still being turned twice annually, the calculation 
for the foregoing operation becomes as follows : 



Expenditure. 



Depreciation on logging investment 

Taxes and insurance 

Other logging costs 

Stumpage 

Depreciation on milling investment 

Taxes and insurance 

Other milling costs 

Total 



Amount 

per thousand 

feet. 



$0.34 

.09 

4.86 

1.75 

.39 

.16 

3.87 



11.46 



Portion 

paid from 

working 

capital. 



$0.09 
4.86 
1.75 



.16 
3.87 



Numher of 
times work- 
ing capital 
is turned 
annually. 



Workingcap- 
ital required 
per thou- 
sand feet 
annually. 



SO. 045 
.81 
.292 



.08 
.322 



1.549 



APPEAISING STUMPAGE ON NATIONAL FORESTS. 



27 



Under these conditions a working capital of but $24,784 is required to carry 
tlie same annual cut. The average turn is nearly seven times a year, and about 
15 per cent of the sum of annual operating and stumpage costs is sufficient for 
working capital. 

Margin for contingencies. — Computations of working capital on the average 
turn are usually overconservative. A surplus must always be on hand to meet 
special demands, and the funds at work in the business can not always be ex- 
panded or contracted for short periods. Usually a margin of 10 or 15 per cent 
should be added to the sum deduced as above to put the business on a practical 
working basis. 

In Slow Operations. 

In driving or other operations whose successive steps consume the greater 
part of a year the floating capital required usually ranges from one-half to- 
three-fourths of the total yearly operating and stumpage costs. Instead of esti- 
mating the " turn " of the funds employed in each part of the operation the total 
working capital may conveniently be averaged for the year by tracing outgo> 
and income as follows : 

In a cut of 20,000,000 feet annually it is assumed that stumpage payments, at 
$2.20 per thousand, average as of January 1 ; that logging costs, at $4 per thou- 
sand, average as of February 1 ; that driving costs, at $1 per thousand, average 
as of May 1 ; and that milling costs, at $3.50 per thousand, average as of July 
1. Sales at $15 per thousand feet begin in August. The sale of 2.000,000 feet is, 
credited to the 1st of September and each of the succeeding nine months. 

The working capital required to carry this business would then be : 



For— 


Balance 
between 
outgo and 
income for 
the year. 


Balance 

from 

preceding 

year. 


1 

( 

Working , 

capital for i 

the month, i 

! 


For— 


Balance 
between 
outgo and 
income for 
the year. 


Balance 

from 

preceding 

year. 


Working 
capital for 
the month. 


January 

February .... 


.?44,000 
124,000 
124,000 
124,000 
144,000 
144,000 
214,000 


-1- $64, 000 
+ 34,000 
+ 4,000 

- 26,000 

- 56,000 

- 86,000 


$108,000 ' 
158,000 1 
128,000 
98,000 
88,000 
58,000 1 
214,000 


August 

September... 

October 

November. .. 
December 

Average 


$214,000 




$214,000 


184,000 

154,000 

124,000 

94,000 




184,00a 




154,000 


April 

May 

June 

July 




124,000 




94,000 








135,167 











Or 63 per cent of the total animal producing cost of $214,000. Ten or 15 per 
cent sliouhl be added to this total for safety. 

The figures in tlie first column from January to August are the accrued costs 
of stumpage, logging, driving, and manufacture. The figures from September 
to December and in the second column from January to March represent the 
accrued costs less sale receipts. The second column figures from April to June 
represent the surplus of sale receipts over accrued operating costs. The figures 
in the third column represent the capital required to carry current operating 
costs ench month in the year. 

Calculation of Working Capital from Average Stocks on Hand. 

Another method of determining working capital, which is perhaps more direct 
and tangible than either of those discussed, is to foot up the average credit 
balance for advance stumpage payments, the value of the average stock of logs 
and lumber, the average total of bills receivable which are carried for on© 
month or more, and a reasonable cash balance. The value of log and lumber 
stocks should be calculated from current stumpage and operating costs. While 
86001—22 5 



28 



APPRAISING STUMPAGE OX NATIONAL FORESTS. 



the supply of logs and lumber varies to a greater or less degree, a fair average 
can usually be figured as constant in the business. This method furnishes an 
excellent check on computations of working capital from the average turn. 

If logging and milling are figured separately, the working capital for each 
operation may be determined as follows : Multiply the cut of each month by 
the number of months until the logs reach the mill ; the sum of these products 
divided by tlie annual cut gives the weighted average time in months that the 
money is tied up. The annual cut multiplied by the operating costs, including 
stumpage, of logging per thousand feet, or other unit of volume u.sed, will 
give the total expenditures for that purpose. This sum multiplied by the aver- 
age number of months that the money is tied up and the product divided by 12 
will give the average annual profit-bearing investment represented by working 
capital in the logging operation. 

The money tied up in lumber in the yard may be determined by multiplying 
the total cost of production per thousand feet of lumber tally, including stump- 
age and logging costs, by the average amount of lumber carried in the yard. 

The average balance to the credit of the operator for advance stumpage pay- 
ments and a margin for contingencies should be added. 

Use of normal rather than speculative stocks.— The quantity of lumber car- 
ried in the yards after manufacture should be estimated from the average yard 
stock under normal trade conditions, eliminating excess stocks carried for 
speculative reasons. Stocks carried over periods of depression to obtain normal 
prices may, however, be included in computing the average. 

Working Capital in Sales of Special Products. 

In sales of tie or mining material, telephone poles, etc., the product is usually 
contracted to one buyer for payment on delivery. In driving or fluming opera- 
tions deliveries are ordinarily made during a short period of the year and 
expenditures for stumpage and logging month by month must be carried until 
the date of delivery. The average working capital required may be estimated 
by computing the " turn " of each month's outlay or the time which must elapse 
before cash returns are received. A simple method of obtaining this result 
is to set down each month's expenditure, multiply it by the number of months 
intervening until time of payment, and divide by 12. To illustrate: 

Logging in a small tie operation begins on the 1st of August and continues, 
including skidding and decking, until the 1st of April. The ties are flumed in 
June, and payment for the season's cut received in full by August 1. The work- 
ing capital may be computed from the monthly expenditures as follows : 



Date of 
expenditure. 


Amount. 


Months 

until 

payment. 


Amount 
e.xteuded 
for number 
of months. 


1 

Date of 
expenditure. 


Amount. 


Months 

until 

payment. 


Amount 
extended 
for number 
of months. 


Sept. 1 

Oct. 1 . 


$2,000 
.500 
.500 
400 
1,000 
SOO 


11 
10 
9 
8 
7 
6 


S22,000 
5.000 
4,. 500 
3,200 
7,000 
4,800 


Mar.l 

Apr. 1 

July 1 

Total.. 


-SI, 200 
1,.500 


5 
i 


$6,000 
6,000 


Nov. 1 


900 1 


900 


Jan. 1 






59,400 


Feb. 1 

















.$59,400^12= $4,9.50. the average amount of working capital required. (For a 
detailed illustration of the method, see p. 67.) 

This method adapts itself to any special features in the expenditure.s of an 
operation, such as the purchase of supplies for an entire winter in advance, the 
payment of labor bills at the end of the logging season, etc. It is also readily 
appled in sides wliere i^ayments for the product are distributed throughout the 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 29 

year, by estimating the numlier of months elapsing between the date of each 
expenditure and its return. 

Such calculations should be based upon the terms and methods of payment for 
labor, supplies, etc.. in common usage. As the standard practice, however, com- 
missaries will not be considered in estimating working capital. Where board is 
furnished to laborers at a stated price or a general store is conducted in con- 
nection with a logging operation, it should be treated as a separate business 
enterprise not affecting the working funds required in the timber sale. If wages 
include board, the current cost of supplies and labor for the mess is a proper 
item of working capital. ^(See "Commissaries and boarding houses," p. 8.) 

OVERRUN. 

Source of Overrun. 

The Forest Service will follow the practice of lumbermen in prorating logging 
costs on log scale and milling costs on mill tally. These two standards seldom 
agree. The product of the mill ordinarily overruns the decimal C log scale 
from 4 to 30 per cent, depending on the size, length, taper, and soundness of the 
timber, the thickness of the saw and other matters of mill equipment, the exact 
dimensions to which lumber is sawed, and the class of material manufactured. 

A Necessary Factor in Stumpage Appraisals. 

The Forest Service does not guarantee an overrun. It is, however, too large 
a factor to be ignored in accurate stumpage appraisals. In many operations 
overruns alone furnishes a fair profit. If equivalent to 20 per cent or more of 
the log scale, it may easily increase profits from 60 to 100 per cent. Nor should 
overrun be dismissed as no more than an offset to business hazards such as 
car shortage, fire losses, labor troubles, and the like. Accurate appraisals must 
take into account all of the actual costs which can be foreseen and all antici- 
pated returns, one of which is overrun. Hazards which enter into the risk of 
the operation but do not justify specific cost items .should be given full weight 
in the margin allowed for profit and risk. 

Determination of Overrun. 

The percentage of overrun is determined for each general region by species, 
size and soundness of logs, types of mills, and sizes of lunil)er normally pro- 
duced. These standard overrun percentages are obtained by mill-scale studies 
or special mill-tally checks against the log scale under standard National 
Forest scaling practice. In the absence of standard figures, mill i-ecords may 
be used provided there has been a thorough check of the scaling practice fol- 
lowed at these mills. Separate standards are established for small circular 
mills and large band mills. The standard overrun percentage used in an 
appraisal should be determined according to the size of the timber, the per- 
centage of defect, the class of material to be manufactured, and the type of 
mill best adapted to the timber and chance. 

Any percentage used should be conservative, particularly if exact checks on 
the Forest Service scale in the same class of timber have not been obtained. 
Overrun at the saw is not a safe criterion. Losses in quantity between sawing 
and shipping often reduce materially the gain at the saw. and must be con- 
sidered. However, losses in grade during seasoning and the tendency for the 
overrun to come largely from logs yielding chiefly low-grade lumber do not 
affect the percentage of overrun, but are provided for by the method of 
determining average selling prices. 

Log Scale the Final Basis in Calculations. 

In their final form, all factors in the appraisal will be reduced to log scale. 
Depreciation and logging costs will be computed directly on 1(\-- scale. By use 



30 APPEAISING STUMPAGE ON NATIONAL FOEESTS. 

of the ascertained per cent of overrun, milling costs and selling prices will be 
extended to the log-scale basis. This can be done by multiplying the milling 
cost and selling price per thousand feet of lumber by 1 plus the per cent of 
overrun. The final computations of profit margin and stumpage price vi'ill then 
be on log scale. The following example will illustrate the method : 

Let it be assumed that logging costs $4 per thousand feet log scale and depre- 
ciation $1 ; that milling costs $5 per thousand feet of lumber ; that the average 
selling price is $15 per thousand feet of lumber; and that the overrun is 15 
per cent. Then : 

Logging 1 M log scale .. $4.00 

Depreciation on 1 M log scale 1.00 

Milling 1,150 feet of lumber (1 M log scale) at $5 per M 5. 75 

Total costs 1)0.75 

Price of 1,150 feet of lumber (1 M log scale) at $15 per M 17.25 

Margin for stumpage price and for profit and risk per M log scale 6. 50 

LUMBER AND LOG SELLING PRICES. 

Appraisals Based Upon Lumber Selling Prices. 

Appraisals of saw timber on the National Forests will be based upon the 
selling prices of lumber manufactured in the same region from stumpage of 
similar quality. The determination of the lumber selling prices applicable to 
the chance is thus one of the most important duties of the appraiser. 

The average mill-run values, by species, f. o. b. cars, received by efficient 
manufacturers, operating under the usual variations of type in the region, 
are probably the most reliable figures to use in stumpage appraisals for timber 
of similar quality. 

Average Selling Price of Various Grades. 

The problem is comparatively simple where lumber of but one grade is manu- 
factured. In all but the smaller operations, however, lumber is graded and 
sold at grade prices which cover a wide range in value. The problem is further 
complicated by varying prices for different dimensions. The average selling 
price of the product in such cases depends not only upon the price obtained for 
each grade, but upon the proportion of the different grades in the standing 
timber. To ascertain this proportion, a careful examination of the timber is 
necessary, checked wherever possible by the cut of grades obtained in manu- 
facturing similar stumpage at local mills. Detailed mill-scale studies, based 
on log grades, are the most satisfactory basis of estimating the proportion 
of grades which a given tract of timber will yield. 

The proportion of grades and the mill-run value will be taken as at the 
time of shipment, not at the saw, thus allowing for deterioration during sea- 
soning, planing, and handling in the yard. 

Calculation of the Average Selling Price. 

An example of the most desirable form of calculating an average selling 
price by grades, taken from a specific case, follows : 

Estimated per cent of grades, with average grade prices for western yellow pine. 

2 per cent B and better select at $44 -$0. 88 

8 per cent C select at $36 2. 88 

12 per cent No. 1 shop at $26 3. 12 

20 per cent No. 2 shop at $18 3. 60 

25 per cent No. 3 shop at $13.50 3. 37 



APPRAISIXG STUMP AGE OX XATTONAL FORESTS. 31 

20 per ceut No. 2 common boards at $16 $3. 20 

8 per cent No. 3 common boards at $13 1. 04 

5 per cent box at $10 . 50 

100 per cent. Average 18. 59 

Average Selling Price of Mixed Stands. 

If necessary to obtain the average lumber selling price of all of the stumpage 
in mixed stands, a similar calculation may be made by species, as follows : 



Per 
cent. 



Species. 



Western white pine. 

Yellow pine 

Larch 

Douglas flr 

Engehnann spruce.. 

White fir 

Western red cedar . . 



Average for the chance. 



Average 


Weight in 


selling price 


average pnce 


of species. 


fortheclmnce. 


$21.00 


56.30 


17.00 


.85 


13.00 


1.56 


13.00 


2.34 


15.00 


.45 


12.50 


3.125 


12.00 


.84 



15.465 



Lumber Prices Prevailing in Producing Regions. 

The effort should be to obtain average lumber prices, by grades, holding for 
the producing region, or manufacturing district in which the chance is located. 
Such a region ordinarily includes all the mills (1) manufacturing timber of 
similar species and generally similar quality, and (2) subject to the same mar- 
ket conditions as represented by freight rates to main consuming points and 
competition with other manufacturing districts. The more mills from which 
price data are obtained the better. The aim will be to obtain grade prices or 
prices by species which are general averages rather than prices applicable to 
a single miU. 

Lumber Prices During Normal Market Conditions. 

Lumber prices holding for brief periods are not reliable. If obtained during 
a year of depression or temporary inflation they are unfair either to the 
Government or the operator. As far as practicable, the prices used should 
represent normal conditions in the lumber market. This can be done most 
practicably by averaging the prices received during a period of three years, 
or even longer if repeated fluctuations have occurred. As a general rule no 
prices should be used which do not represent the average lumber market 
during at least one year. Average operating costs over the same period should 
also be used in the appraisal. 

The appraiser should furthermore study the data on prices for as long a 
period as authentic records are available and ascertain as far as he can the 
broad market tendencies indicated. If a straight average does not meet his 
judgment of a normal price in line with the movements of the market, he should 
give the average and then recommend other selling prices which in his belief 
should be used, with his reasons. 

state of Manufacture and Shipment. 

Prices should be taken as a rule on lumber ready for shipment, commonly 
f. o. b. cars at the mill or nearest common-carrier shipping point. In the case 
of plants which finish a portion of their product, the prices of the respective 
grades in the proportion and state of finish at which they are shipped may 
be used. Intensive forms of manufacture, as boxes, sash and door, etc., should 
be disregarded and prices reckoned on the lumber itself, preferably in rough 



32 APPEAISING STUMPAGE ON NATIONAL FOEESTS. 

form, at the most convenient point in the whole process. Lumber freights over 
common-carrier roads should be eliminated from price and cost estimates as 
far as practicable. Net returns at the mill or its nearest common-carrier ship- 
ping point is the standard basis for appraisals. (See discussion of discounts 
"For accounts receivable," p. 25.) 

Valne of By-Products. 

The sale value of lath, slabwood, and other by-products of the log which are 
usually manufactured and have an established market should be taken into 
account in computing the total return for each thousand feet log scale. This 
may be done by adding the milling cost on such products per thousand feet log 
scale to the other milling charges and similarly their sale value to the lumber 
selling price computed on log scale. The same result will be closely approxi- 
mated by adding the profit on by-products per thousand feet log scale, to the 
average lumber selling price, but this method should be used only if data on 
cost of production of the by-product can not be obtained. 

Prices of Other Products Than Lumber. 

"When timber is sold as railroad ties, shingles, telephone poles, etc., the selling 
prices of these products as they pass from the hands of the purchaser will be 
ascertained and used in the calculation in the same manner as the selling price 
of lumber. Where products like cedar poles are handled by distributors, with- 
out manufacture, f. o. b. prices at main shipping points will be the ordinary 
basis taken. 

Use of Log Prices as a Check. 

The price of saw logs will not be used, however, as a basis for stumpage 
appraisals. For this purpose the lumber market is taken by the Service as 
determining the value of saw timber. In sales to loggers appraisals should be 
based on lumber selling prices and all costs from stump to market reckoned as in 
sales to purchasers who operate mills. Log prices, however, serve as an excel- 
lent check in such sales. They should be ascertained and considered by the 
appraiser in fixing the price of the stumpage. The report should indicate how 
far it will be practicable for loggers to purchase stumpage on a lumber market 
appraisal and what prices would be equitable if the log market were the basis 
taken. 

MARGIN FOR PROFIT AND RISK. 

What Profit Is. 

Profit is the amount which may be taken out of the business over and 
above depreciation charges, while still leaving its working capital intact. It 
is usually figured as a percentage, returned each year, of the total investment 
in the enterprise. It is most clearly represented, however, by a sum per thous- 
and feet or a total sum on the year's cut. The cash balance at the end of a 
year's operation consists of three parts: (1) An amount set aside for deprecia- 
tion, which pays back some portion of the original investment, (2) working 
capital, or the portion of it available as money, and (3) profit, or the surplus 
over the other two sums. 

The preliminary work in stumpage appraisals results in two estimated 
figures: (1) The sum of operating costs and depreciation of fixed investments, 
and (2) the average selling price of the product. The difference between the 
two is made up of profit and stumpage price. The final problem is to divide this 
amount fairly between stumpage and a mai'gin for profit and risk. 

Profit Margin in Stumpage Appraisals. 

No profit is guaranteed by the Forest Service. It is necessary, therefore, not 
only to appraise on the basis of a fair net return to the opeator, but to include 



APPBAISING STtJMPAGE ON XATIOXAL FOEESTS. 33 

an additional amount, varying according to the risk involved, to protect the 
profit and make more probable its realization. Vriiat the appraiser really 
estimates, therefore, is a profit margin made up of these two parts. 

An equitable profit margin, based upon ordinary management and average 
luck, is essential in every stumpage appraisal. The aim will be to make possible 
a fair industrial return to the average operator, proportioned to the risks and 
commercial standing of the l)nsiness, not tlie specuhitive or unearned reward of 
the shrewd investor. 

Elements in Margin for Profit and Risk. 

The margin of profit in timber appraisals involves three general elements : 
(1) interest on capital invested, (2) reward for the personal energy and ability 
of the operator, and (3) allowance for risks to which the business is subject. 

Interest on investment. — Interest on invested capital at prevailing commercial 
rates is often treated as a cost rather than profit. It is, however, a return from 
the operation, and in National Forest appraisals will be classed with other re- 
turns as an element of profit. 

Capital industrially employed in National Forest operations is entitled to a 
return on its own account, regardless of any other elements of profit, of at least 
6 per cent. In nearly all business, return on invested capital is the most clearly 
established and controlling basis of profit. This is particularly true of the 
larger and more permanent enterprises whose processes are standardized and 
whose organization is developed along permanent and stable lines. 

Reward for personal effort. — The second element, reward for personal initia- 
tive and capacity, is much more variable. In large operations, business ability 
and .skillful management are in the main furnished by employees, paid by sal- 
aries, and accounted for in costs of production. The personal element does not 
enter largely into profit, although usually evident in the organization and begin- 
ning of an enterprise and not infrequently recognized in going operations by 
stock bonuses or profit sharing. It is of special importance in lumbering as 
compared with other industries on account of the lack of standardization proc- 
es.ses and the knowledge of many different commercial and technical branches 
which is required. 

In the smaller enterprises of a more temporary character and less stable or- 
ganization individual energy and initiative are much more important factors in 
the conduct of the business. The capital invested is often relatively small and 
profit may be largely a reward for personal effort. 

The weight to be given this element in Forest Service appraisals will neces- 
sarily vary in accordance with the character of the chance. It will be gi'eater 
in .small. short-live<.l operations than in large sales of long duration. It should 
be slight in appraisals of timber available to well-established, going plants. On 
the other hand, it must be relatively great in the case of new entei'prises with 
an organization to create and markets to develop, particularly if special condi- 
tions must be met which require exceptional experience, Inisiness capacity, 
or other personal qualifications on the part of the purchaser of the timber. 

Business risks. — The third element of profit, a return covering business risks, 
is required in lumbering to a greater degree than in most other industries. This 
risk consists (1) in the double chance of a decline in the lumber market and 
an increase in operating costs, which lumbering history shows to be great; 
and (2) in possible losses and accidents which are inherent in a business 
dealing with rugged physical conditions, hvit can not be accurately foreseen or 
reckoned in cost estimates. While the physical risk to investments beyond 
the limits of insurance are not ordinarily great, serious business losses are 
usually involved in their destruction or injury. The destruction of a sawmill by 



34 APPRAISING STUMPAGE OX NATIONAL FORESTS. 

fire, for example, involves not only the loss of the value of the plant not covered 
by insurance, but also loss of custom, loss of operative force, and loss of profit 
through reduction in output. 

Particular chances are often subject to special risks. These directly affect 
their value and must be taken into account in appraisals by giving proper 
weight to the risk element in the profit margin. A stream may be of such a 
nature as to endanger either hanging up drives indefinitely or carrying them 
through storage booms. Small streams which have never been driven are 
usually uncertain and risky features of a chance. Similarly the necessary loca- 
tion of a road, flume, or railway may subject the operation to special risk on 
account of frequent washouts. 

Risk on fixed investments and working capital. — Ordinarily, and particularly 
with new enterprises, the risk on working capital is less than on fixed invest- 
ments. The latter are not merely liable to physical damage, but may become a 
total or partial loss if the enterprise fails. Working capital, which is rep- 
resented at any given time by logs, lumber, bank account, bills receivable, and 
stumpage deposits, is subject to reduction, but is seldom subject to total loss, 
as is the investment in the grade for a logging railroad if the business proves 
to be a failure. Lumber and log stocks can usually be realized on and out- 
standing accounts can be collected. Hence in business practice a smaller rate of 
profit margin is sometimes figured upon working capital than upon fixed invest- 
ments. 

With well-established business undertakings, however, the risk on the work- 
ing capital may be greater than on the fixed investments. The working capital 
at any given time may be largely represented by expenditures for labor, and a 
marked decline in the value of the product may not only wipe out the expected 
profit but may also cause a loss, which loss takes the form of a reduction in the 
working capital. The fixed investments would not be lost as the result of such 
a temporary lack of proportion between labor costs and selling prices. 

The relative risk to the fixed investments and to the working capital should 
be recognized either by separate treatment or in the average rate of margin fon 
profit and risk. 

Other factors affecting risk. — In the consideration of timber chances, oper- 
ators must also take into account possible overestimates of the quality of the 
stumpage or the selling price of the various lumber grades and possible under- 
estimates of necessary investments or operating costs. The size and perma- 
nency of the operation are important factors. Large investments carried for 
long periods, like railroads and modern office buildings, are satisfied with a 
lower return than smaller, less stable enterprises. Operators with established 
markets and transportation facilities will accept a lower return than where 
these features of the business must be constructed or developed. All of these 
are factors of risk which must be weighed by the appraiser in determining 
the margin which should be allowed. 

Comparison unth other kinds of business. — The lumber business involves 
greater risk and uncertainty than most manufacturing enterprises. Industries 
characterized by permanence and physical safety of investments, standardized 
processes, and assured markets are run on a margin of profit which would be 
wholly inadequate for lumbering. Its general conditions are entirely different. 
Each operation must be adapted to the topography of its chance. New 
methods must often be developed and applied to peculiar local conditions. 
Exactness in estimates of investments and operating costs is practically im- 
possible. 

The capital invested in fixed improvements is subject by their nature and 
location to a fire risk which can not be as fully insured against as in most 



APPRAISIXG STUMPAGE OX XATIOXAL FORESTS. 36 

comparable lines of business. The work is hazardous and injuries to workmen 
are frequent. The hazard from unusual climatic conditions is greater than in 
most manufacturing industries. Losses due to uncontrollable causes, such as 
car shortage and bad accounts, are common. As in other enterprises, the 
business is subject to labor troubles and breakdowns. It is dependent upon 
unskilled labor to an exceptional degree. All of these tend to make a high 
margin for profit and risk necessary. 

Comparison tcith private operations. — Operations on National Forests have 
certain financial advantages when compared with private lumbering. The sys- 
tem of small payments amounts in long-time sales to a substantial saving of 
interest and taxes. The eifect of this, however, is upon cost of production, not 
upon certainty of profit. 

■ Operators in National Forests, however, have some advantages over private 
lumbermen in the matter of risk. Owning no timber, they have a smaller 
total investment, and consequently less to lose if the enterprise is a failure. 
Since title to the timber does not pass until it is cut and scaled, they run much 
less risk of loss from fii'e. 

On the other hand, contracting to log under Government supervision nece.^v 
sarily involves a risk, however small, which the operator on private land avoids. 
Furthermore, the purchaser of National Forest timber foregoes to a large 
extent speculative profits from increased stumpage and lumber values and from 
overrun, both in estimate and scale. 

METHODS OF RECKONING MARGIN FOR PROFIT AND RISK. 

Investment Method. 

A percentage return on the capital Invested, covering all of the elements 
discussed above, is the clearest and most satisfactory means of reckoning the 
margin for profit and risk. It accords with the usual business practice and 
conception and permits ready comparison with other industries. This method 
of reckoning profit margin, known as the " investment method," will be stand- 
ard, in the Forest Service. It should be employed uniformly In appraising the 
larger chances, and in appraising the smaller bodies of timber wherever it is 
applicable. 

The results should be checked by the money profit mai-gin per thousand 
board feet (see p. 36), especially if the working capital will be turned over 
frequently. 

Overturn Method. 

Another method of reckoning profit is to take a percentage of the total 
operating cost and depreciation, or " overturn." This should be used in cases 
where the investment is very small in comparison with current operating costs 
or is difficult to estimate, and hence affords an insufficient basis for determin- 
ing the profit margin. The method is used largely in railroad work and general 
contracting. If the sum of depreciation and operating costs, for example, is 
$12 per thousand feet, the profit and risk margin may be figured as 20 per cent 
of that amount, or $2.40. 

The overturn method is of special value in small sales where the investment 
is negligible or where operating costs can be closely estimated but the capital 
required is uncertain or difficult to determine. Operating costs, which make 
up most of the overturn, are usually ascertained more readily than invest- 
ments. The overturn method is thus safer for appraisers who are not expert 
in calculating the investment features of lumbering operations. It may also 
be used if desired in arriving at the profit due on logging as distinct from 
manufacturing where it is necessary to deal separately with the two parts of 
the operation. (See p. 41.) It may also be used in determining the profit 



36 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

margin due on manufacturing in regions for which standard costs, including 
depreciation, have been determined (see p. 41), even if heavy investments in 
logging improvements and equipment require the use of the inve>;tment method 
for that part of the operation. 

Compensation for Personal Services. 

In very small operations, a comparison of the stumpage price indicated by 
computations by either the Investment or the overturn method with the 
prices received for similar private timber or with current bids sometimes shows 
that those indicated prices are, not the existing market value of the timber. 
Usually in such cases the purchaser plans to do a part of the logging or mnnu- 
facturing himself. The capital required, as a rule, is relatively little and 
inadequate as a basis for reckoning profit. Supervisory charges are usually 
not covered in operating costs. Often a contract for the product has been 
secured in advance, thus greatly reducing the element of risk. The energy 
and ability of the purchaser are the main factors upon which the enterprise is 
conducted. The profit margin may be reckoned in such cases chiefly as pay 
for the operators' time and enterprise. An additional margin should always 
be figured on any capital actually required. 

Similar conditions often apply to small operations for special products like 
railroad ties or mining timbers, which require comparatively little capital. 

Checks on Profit-Margin Calculations. 

The rates of margin given in these instructions are necessarily flexible. Final 
rates can be established only by experience in studying and analyzing actual 
returns from many different operations. It is therefore essential to check calcu- 
lations of profit margin by direct operating standards as far as they can be 
obtained. 

By going operations. — Systematic study of the profit obtained in going sales 
and private operations is a valuable and necessary check upon this feature of 
stumpage appraisals. To permit direct comparison, it should be computed in 
terms of per cent on investment, per cent on overturn, etc., conforming with 
the methods prescribed in these instructions. A frequent check of the results 
of former appraisals to ascertain what rates of margin are sufficient and 
equitable under the particular local conditions is one of the most essential 
parts of the appraiser's work. 

By cnirent hids. — The margin for profit and risk indicated by current or 
past bids for National Forest chances in the same region, as showing the basis 
upon which operators are willing to buy stumpage, should be used to check ap- 
praisals under either the investment or overturn method. As the lumbering in- 
dustry develops in new regions and becomes more stable, operators are willing 
to purchase at lower profits. This is shown by the course of stumpage values 
in the older manufacturing regions. The prices bid in current sales thus form 
the best index to the rate of profit margin required by the local lumbering 
industry. 

By money per thousand feet. — The profit margin in the appraisal may be 
checked also as a sum in dollars and cents per thousand board feet or other 
unit of output. A stated profit per thousand feet is a direct and tangible figure, 
widely employed in the lumber business. As experience is gained, it is probable 
that more definite standards of profit in money per thousand feet can be estab- 
lished for operations of varying size and kind of output under each of the 
more common sets of local conditions with respect to markets, logging risks, 
etc. Such standards will greatly facilitate uniform appraisals. A check of 
the results obtained by any method of reckoning profit margin, from this 
standpoint, is therefore desirable. 



APPEAISING STUMPAGE (I.N NATIONAL FORESTS. 37 

APPLICATION OF THE INVESTMENT METHOD. 

Profit margin calculated as a percentage of the money in the business should 
strictly be proportioned each year to the capital invested in the operation 
during that period. For simplicity, however, the average investment during 
the life of the sale may be taken. This is not mathematically exact as to the 
actual amount invested during any given year, but is a fair basis for cal- 
culating profit margin during the operation as a whole. 

Frequency of the Turn Unimportant. 

As indicated on page 25, the frequency of the turn has an important bearing 
on the amount of working capital required in the business. The average an- 
nual investment, once determined, is considered as a certain sum earning an- 
nually a specified percentage of itself, and the frequency of the turn affects 
the calculation of margin for profit and risk only through the selection of a 
proper rate. 

Calculation Under the Investment Method. 

The application of the investment method is simple. The average amount of 
money employed in the operation, including working capital and fixed invest- 
ments, must be' determined. Working capital can usually be computed as a 
constant amount throughout the operation. A specified percentage of the total 
average investment gives an annual sum which must be set aside as the profit 
margin. This sum divided by the yearly cut gives the profit margin per 
thousand board feet. The sum of margin and depreciation per thousand feet 
and current logging and milling costs deducted from the selling price gives the 
stumpage rate at which the timber should be appraised. Expressed as a for- 
mula, the calculation becomes : 

X=S- [lc + Mc+D+ V^roentoi(A + W n 
|_ ' ' annual cut J 

X represents the stumpage price, S the average selling price, Lc the logging 
costs, Mc the manufacturing costs, D the depreciation of fixed investments, A 
the average fixed investment in the operation, and W the working capital, all 
except A and W as amounts per thousand feet log scale. To illustrate : 

In an operation cutting 10,000,000 feet annually the estimated average invest- 
ment, including working capital, is $235,000 and the annual depreciation $12,000. 
Logging costs $6 per thousand feet log scale and milling $4.50 per thousand feet, 
lumber tally. The overrun for the class of logs involved, yellow pine running 
10 logs par thousand feet, is 20 per cent ; and the average selling price mill run, 
lumber tally, is $16. The operation involves comparatively low risks, the tim- 
ber being cut by an established mill with well-developed markets. A return of 
15 per cent on the iuAestment is deemed equitable. The elements in the formula 
are thus : 

Selling price (1,200 feet at $16 per M) $19.20 

Logging costs $6.00 

Milling costs (1,200 feet at $4.50) 5.40 

Depreciation ($12,000^10,000 M) 1.20 

Margin for profit and risk (15 per cent of $235,000^10,000 M) 3. 52 

Total chai-ges 16. 12 

Stumpage price . 3. 08 



38 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

Rates of Profit Margin Under the Investment Method. 

For a lumbering operation of good size, exteiiding over a period sufficiently 
long to reduce the average risk to working capital from sudden fluctuations in 
the price of the product, 15 to 20 per cent on the average annual investment is 
a fair margin for profit and risk. Lower rates of margin should be used in 
appraisals only when the prices bid in current sales of similar timber show 
that operators consider smaller rates of margin are justified by the conditions 
in the region. On chances tributary to established plants which are in a posi- 
tion to purchase them, in regions where logging involves no extraordinary prob- 
lems or unusual risks, and where the risk to the enterprise is low because of 
well established markets. 1.5 per should be the general standard. If the 
business enterprise is new and recognition must be won in the market, but 
other conditions are as above, the rate of margin may properly be extended 
18 to 20 per cent. If the industry is to be developed largely under new con- 
ditions, as when the product must win a place in the market against the 
custom of trading with older producing regions, or if special risks exist in 
logging, a rate of margin of from 20 to 25 per cent may be equitable. 

As a rule, chances suitable for relatively short-term, medium-sized opera- 
tions should be appraise;! with a rate of profit margin from 2 to 5 per cent 
higher than is used for large chances under similar conditions of physical risk 
and general Jnarketing conditions. This is because of the greater risk from an 
unexpected market depression, which may impair the working capital or even 
imperil the enterprise without the opportunity of the long operation to recover 
such losses when the depression passes. The higher rates should not be used if 
it is customary in the region for the product to be sold at a fixed price, as 
under a contract for the entire output of the operation. 

Different Rates on Different Parts of the Investment. 

As indicated on page 34, the risk to which different parts of the invest- 
ment in a lumbering operation are subject may vary within considerable 
limits. Practically no risk, for instance, attaches to investments in land for 
mill sites. Risks are frequently less in manufacturing than in logging opera- 
tions, the latter being conducted under more hazardous physical and less 
stable labor conditions. Working capital may be subject to greater or less 
risk than fixed investments, according to conditions. Investments in main- 
line railroads which will be maintained as common carriers after the chance 
is logged out are subject to less risk than investments in temporary railroads. 

Where existent, differences in the risk in the investments for manufac- 
turing and for logging, in working capital, and in main-line railroads will 
he recognized by separate rates, or the appraiser will indicate clearly the 
effect of the variations in risk on his choice of an average i-ate. Under 
optimum to average manufacturing and marketing conditions a return of 10 
to 15 per cent on the manufacturing investment is considered reasonable. 
Since physical and business risks are practically eliminated, a low rate of 
profit margin from S to 12 per cent, according to the prevailing rates on short- 
term loans, is often adequate for that portion of the working capital repre- 
sented by accounts receivable or stocks sold but not paid for. A return of 
10 or 12 per cent on the investment in railroads for which permanent traffic 
is anticipate is reasonable. Otherwise no distinction will be made in the 
rate of margin for profit and risk allowed on various parts of the total in- 
vestment, although divergent degrees of risk, such as for the investments in 
mill sites as compared with the working capital necessary for logs and lumber 
on hand, should be considered iij choosing an average rate of margin for the 
remaining investment. 



APPRAISING STUMPAGE ON NATIONAL FOEESTS. 39 

Interest on Borrowed Capital. 

It should be noted that the margin for profit and risk includes whatever 
interest is payable on borrowed capital. No distinction will be drawn between 
bonds, notes, or other loans and capital stock or other funds advanced directly 
by the operator. Out of the profits earned, however, must be taken whatever 
is required to carry the indebtedness of the concern. Most operators after 
paying their annual interest charges from the proceeds of the business enter 
the remainder as profit earned by their own capital. In service appraisals 
which treat borrowed and unborrowed funds alike the margin includes any 
such carrying charges on part of the capital as well as the net returns, averaged 
for all the money used in the business. Exceptionally high interest rates on 
bonds or notes is thus a factor which should be considered in fixing the margin 
for profit and risk. 

APPLICATION OF THE OVERTURN METHOD. 

Profit under this method is a percentage of the overturn, or the entire 
production cost of a thousand feet of timber at the date of sale. Including 
operating charges and depreciation, but not stumpage price. The calculation 
may be expressed by the following formula : 

X=S— (Lc+Mc+i))— per cent of (Lc+Mc+D) 
or transposing 

Z=S— (1+per cent) times (Lc+Mc+D). 
Lc, Mc, and D represent logging costs, milling costs, and depreciation, all in 
amounts per thousand board feet log scale. X is the stumpage price and iS 
the average selling price log scale. Per cent represents the rate of profit 
margin allowed on the overturn. 

Taking the operation used to illustrate the investment method, page 37, 
the following result is obtained from the formula : 

Depreciation is $1.20 as before, logging costs $6, milling costs $5.40, and 
selling price $19.20, all in terms of log scale. If 25 per cent on the overturn 
be regarded as fair, the calculation becomes: 

Per M. 

Logging costs, log scale $6. 00 

Milling costs, log scale 5.40 

Depreciation costs, log scale 1.20 

Total 12.60 

Margin, at 25 per cent 3. 15 

Total cost and margin 15. 75 

Selling value, log scale 19. 20 

Stumpage indicated 3. 45 

It should be noted that the margin for profit and risk in this calculation is 
$3.15, as compared with $3.52 under the investment method with a rate of 
but 15 per cent. The factors affecting comparative results under the two 
methods are discussed under the two following headings. 

Effect of Fixed Investments. 

It is apparent that fixed investments are included in this calculation of profit 
only to the extent of their annual depreciation. The residual portion of the 
fixed investment or wrecking value at the end of the operation is given no 
place in the determination of margin. By this method the margin is thus 
related primarily to operating costs — that is, to the overturn of working capital. 



40 APPEAISIXG STUMPAGE OX NATIONAL FORESTS. 

Bearing' of Frequency of the Turn on Profit Margin. 

Under tiie ovt'rtuni method, the pi'utit uuir.uin allowed, except the small 
part based upon depreciation, is expected to be realized every time the work- 
ing capital expended in operating costs is turned. The frequency of the turn 
thus has an iuiportant bearing upon the total amount earned each year by the 
working capital in the business. In the illustration cited on page 39 for ex- 
ample, the prolit mai'gin on each thousand feet manufactured is $3.15. The 
part of this earned by working capital, excluding depreciation of fixed in- 
vestments, is $2.85. If the turn is but once a year, this profit would be 
earned by $11.40 of working capital, an interest rate of 25 per cent. If work- 
ing capital is turned twice a year, the same profit would be earned by $5.70, 
an interest rate of 50 per cent. If the working capital is turned every three 
months, or four times annually, the money actually used in the business in 
this form would be earning 100 per cent yearly. 

Divergent returns on money invested are thus obtained under the overturn 
method unless the per cent of profit margin is carefully adjusted to the fre- 
quency of the turn. With more frequent turns, lower rates should be used. 

From the foregoing it is clear that the overturn method is not adapted to 
appraisals made primarily from the standpoint of capital invested. The in- 
vestment method should be used invariably under such conditions. The profit 
margin should be based on overturn only when the investment is too limited 
for this purpose, and it is more practicable to arrive at the margin for profit 
and risk on a simple basis of contract work, disregarding investment con- 
siderations altogether. 

When Used. 

The determination of the margin for profit and risk by the overturn method 
is especially advantageous in small operations whose make-up is such that the 
investment method is not applicable ; and in larger operations which require 
comparatively little capital, like many sales of tie, pole, or mining timber, 
in which the overturn may be the most practicable means of determining a 
fair margin for profit and risk proportioned to the character and risks of 
each chance. The overturn method should not be used in the appraisal of 
chances w^hich require heavy expenditures for fixed investments. As a rule 
its use is not justified if the depreciation item forms more than 10 per cent 
of the total cost of production on which the margin for profit and risk ia 
figured. 

Different Rates on Logging and Milling. 

A modification of the overturn metliod may be used in localities where it is 
desirable to treat logging and manufacturing as distinct operations, each earn- 
ing a profit adjusted to its peculiar conditions and risks. In established manu- 
facturing regions, milling is the more stable part of the business. Methods and 
costs are more uniform than in logging, both in the same mill from year to year 
and in different mills cutting the same class of timber. Risks are usually less 
variable than in woods operations. Logging, on the other hand, may be sub- 
ject to varying combinations of topography, climate, accessibility, certain or 
uncertain log transportation, and the like. The range in logging costs and 
investments and in logging hazards may thus be mucli greater than in the case 
of milling. When such conditions exist, particularly in localities where sales 
are made to established mills, it may be desirable to use a uniform rate of 
margin on the overturn in milling, including depreciation of mill investments. 
This rate should be fixed in accordance with local manufacturing standards 
and the frequency of the tui'n of working capital. Under average conditions, 
with working capital turned three or four tiines a year, a margin of 15 per 



APPEAISIXG STUMPAGE OX NATIOXAL FORESTS. 41 

cent on the milling overturn is sufficient. The margin on the overturn in log- 
sing, including depreciation of the logging investments, may then be adjusted to 
the conditions 'and risks on each chance. 

Use of Both the Investment and the Overturn Methods in Same Appraisal. 

As discussed on page 15, manufacturing costs, standardizetl by tyi^es of mills 
and including depreciation, may often be used advantageously to determine by 
the overturn method the margin for profit and risk in milling, although heavy 
logging investments may make it necessary or desirable to use the investment 
method to determine the margin for logging. This combination of methods is 
also sometimes applicable in appraising chances tributary to nulls which have 
already thoroughly depreciated their milling investment by manufacturing other 
timber but can reach additional National Forest timber by making a hea\y 
investment in railroads or other transportation facilities. 

The margin for profit and risk on logging and on manufacturing may also be 
calculated .separately liy using the overturn method for the former and the 
investment method for the latter. This use of the two methods is adapted to 
the unusual conditions in the industry where logging and milling are conducted 
by separate business organizations. Manufacturing operations i-epresent the 
larger investments and their profit can be determined best as a return on invest- 
ment. Logging jobbers, however, who supply the mills with timber require com- 
paratively little capital. Personal ability and effort are as a i-ule the main 
factors in their business. A fair margin for profit and risk may thus be satis- 
factorily determined (1) by the overturn method, or (2) by payment for 
personal services with a percentage return on such capital as their logging busi- 
ness mjiy require. 

■\^'hile a distinction is recognized in calculations of this character between 
logging and milling, the stumpage price should always be obtained from the 
selling price of lumber, not the selling price of logs. (For a further discussion 
of this point see p. 32.) 

Rates of Profit Margin Under the Overturn Method. 

The percentage of overturn used in computing tlie jirofit margin should be 
gauged by the risk, the frequency of the turn, the permanency of the operation, 
and the local requirements and standards of the particular business. T'or tie 
and mining timber business operations, with the cut contracted in advance 
and the market risk thus eliminated. 20 per cent may be taken as standard if 
the turn is only once or sometimes twice a year and the chance involves no 
unusual logging hazards. With several turns a year, but other cond'tions as 
given above. 12 to 1.5 per cent is usually sufficient for operations extending over 
several years. Short operations often require higlier rates. In sawtimber sales 
subject to the usual market risks, as when all or most of the output will be 
sold as produced instead of under a contract made previously, a rate of 20 to 
25 per cent should be used under average conditions with a turn of less than 
three times a year. If inaccessible timber must be opened up, exceptional risks 
incurred in logging or stream driving, or unusual problems in marketing met, 
a margin for profit and risk of 30 to 35 per cent is equitable, especially if the 
turn is expected to be only once a year. 

In every case, the rate should be checked by the amount of margin in money 
terms to make sure that equitable allowance has been made for the risk in 
the labor and market situations applicable to the chance. In small operations 
where the return will be regarded chiefly as compensation for personal services, 
the amount of the margin in terms of money should be considered with regard 
to its adequacy for this purpose, with an additional return on the actual over- 
turn. 



42 APPKAISING STUMPAGE OX NATIONAL FORESTS. 

DISTRIBUTION OF PROFIT MARGIN AND DEPRECIATION IN MIXED 

STANDS. 

Prorated on Quantity of Timber. 

Ill the foregoing instructions protit margin and depreciation have been pro- 
rated evenly over the entire cut. This is the simplest method and is directly 
applicable where only one species is involved. The same method may be used in 
mixed stands. Average figures for profit margin and depreciation, together 
with the operating costs, may be deducted (1) from the selling price for each 
.species giving directly its stumpage rate, or (2) from an average selling price 
for all species giving an average stumpage rate, which may then be distributed 
over the various species. 

Prorated on Net Value of Timber. 

It is preferable to prorate the total annual profit margin and depreciation in 
mixed stands on value rather than quantity. The final results are the same. 
Distribution on value, however, furnishes a fairer basis for fixing stumpage rates 
as between species. It also affords the most logical means of carrying out 
the Service pi)licy of maintaining a minimum rate for green timber of each 
species and adjusting stumpage prices on the more valuable timbers so that they 
will carry the less valuable in the sale. At the same time it facilitates giving 
due weight in appraisals to differences in producing costs between species, as in 
reduced milling charges for inferior woods manufactured only into low-grade 
lumber or timbers. 

The most satisfactory method is to prorate the gross annual depreciation 
and profit margin over the difference between operating cost and selling price, 
for the several .species in the proportions entering into the annual cut. To 
illustrate : 

A yearly cut is made uv of 4,000.000 feet ot sugar pine. 3.000,000 feet of yel- 
low pine, and 2,000,000 feet of white fir. The margins between selling prices and 
costs of production, exclusive of depreciation and profit and risk margin, are : 



RnpriPo Selling Operat- i Ma^™, 

bpecies. __j„„ I i_„ „o„|. , Margin 



price. ' ing cost. 



Sugar pine'. : $20 

Yellow pine | 18 

White flr 15 



SIO I $10 

10 i 8 

9 6 



The total net value, or sum of the margins, over which depreciation and 
margin for profit and risk may he prorated, is thus : 

Sugar pine, $10X4,000 M $40,000 

Yellow pine, $8X3,000 M 24.000 

White fir. $6X2,000 M 12,000 



Total 76,000 

The annual depreciation and margin for profit and risk (using investnienr 
method) which must be paid out of this total has been computed as $34,200. 

Hence '"^^^'^^ =$0.45. That is, every dollar of the difference between operating 

costs and selling price must pay 45 cents toward profit and depreciation. The 
foUowiiig charges per thousand feet for depreciation and profit margin, by 
species, are thus obtained : 

Sugar pine, 10X$0.45 $4. 50 

Yellow pine, 8X$0.45 3.60 

White fir, 6X$0.45 2.70 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 43 



By this method inferior species which yield no margin between operating 
costs and selling price, or a negative margin, but which must be included in 
the sale for silvicultural reasons, are automatically relieved of profit and de- 
preciation, and the charge upon the other timbers for these items proportion- 
ately increased. 

The same result is readily obtained on a thousand-foot basis, using the per 
cents of the different species in the cut. That is, to obtain the average margin r 

45 per cent sugar pine at $10 $4. 50 

33 per cent yellow pine at $8 2.64 

22 per cent white fir at $6 1.32 

Total 8. 46 

Depreciation and profit margin per M feet 3. 80 

$S 80 

^ '^ =$0.45, to be taken from each dollar of gross margin for these items. 

The above calculations show that $0.45 of each dollar of the difference be- 
tween selling prices and operating costs is to be taken for profit margin and 
depreciation. The amount then left for stumpage is $0.55 of each dollar. 

This method of adjusting the prices of the more and less valuable species is 
believed to accord with customary business practice. Volume of money handled, 
rather than quantity of this or that product, is the usual basis for figuring 
carrying charges, depreciation, and returns. In logging, improvements are fre- 
quently constructed primarily to take out certain valuable species. Inferior 
timbers may be cut or left as the market warrants. In such cases operators 
will usually cut inferior species if a profit can be netted over bare operating 
costs, figuring that the cost of improvements is borne wholly by the better stuff. 
The foregoing is believed to be a logical and rational application of this prin- 
ciple. 

The directness with which the more valuable species may be made to carry 
their fair proportion of the profit margin and depreciation is one of the advan- 
tages of the investment method. The same general principle of placing heavier 
charges against the better species can be applied under the overturn method by 
charging all depreciation to the more valuable species. This results in an 
increase in the profit margin for these species and a decrease in the profit 
margin for the inferior species. 

STUMPAGE PRICE. 

How Obtained in Mixed Stands. 

The value of stumpage is taken, in Forest Service appraisals, to be the por- 
tion of the lumber selling price left after deducting operating costs, deprecia- 
tion, and profit margin. In mixed stands it should be obtained for each species 
by deducting these charges from its own lumber price. Depreciation and profit 
margin should be prorated over the cut on a net value basis, as described under 
" Distribution of profit and depreciation in mixed stands " on page 42. 

Flat Rates Not Desirable. 

^lat rates for two or more species of different lumber values are not gener- 
ally desirable. They may prove 'inequitable if the proportion of species in the 
cut differs from that in the estimate ; and they tend to make close utilization 
of inferior species covered by the average price diflicult. The standard practice 
of the Forest Service, therefore, will be to appraise each species having a dif- 



44 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

ferent lumber value separately and as far as possible upon its own merits. To 
simplify scaling and cutting reports, however, species whose appraised value 
does not differ by more than 10 per cent may be thrown together under one 
<;ontract price. 

Use of Minimum Stumpage Rates. 

The appraisal of inferior species not infrequently results in very low or 
negative stumpage prices. It has been deemed advisable to establish a mini- 
mum rate of 50 cents per thousand feet for green timber below" which no species 
will be sold. Inferior species will therefore be appraised on their own merits 
as determined by lumber price and cost of production as long as the resulting 
stumpage value is not less than 50 cents per thousand feet. ( See also " Trade 
valuation of inferior species " below.) If the calculation brings the price below 
50 cents, the appraisal will be at that figure. The prices put upon the more 
valuable species in the stand must then be reduced sufficiently to carry the dif- 
ference and maintain the average profit which is deemed equitable on the entire 
cut which the purchaser is required to take. Optional material will not be in- 
cluded in the computations. 

Distribution of Loss on Inferior Species. 

Such adjustments in the stumpage rates of various species may be made by a 
simple arithmetical process, as follows : 

It is assumed that separate appraisals, on individual lumber price and pro- 
ducing cost, give the following stumpage rates in a mixed stand of California 
timber : 

Sugar pine (30 per cent of the cut) $5.00 

Yellow pine (35 per cent of the cut) 4. 00 

White fir (20 per cent of the cut) .20 

Incense cedar (15 per cent of the cut) . — .10 

By appraising white fir and cedar at the Service minimum of 50 cents, the 
amount to be made up. on the other species, thousand feet for thousand feet, is 
20 per cent of $0.30+15 per cent of $0.60, or $0.15. This amount will be spread 
over the sugar and yellow pine prices ; that is, 30 per cent of $5+35 per cent of 

$0.15 
$4, or $2.90, |2^~^PP^oximately 5 cents, to be deducted from each dollar of 

stumpage value in the pines. The adjusted rates are therefore: 

Sugar pine $4.75 

Yellow pine 3.80 

White fir .50 

Incense cedar . 50 

This method should ordinarily be used only when necessary, after margin 
and depreciation have been prorated on value (see p. 42), to maintain the 
minimum price. 

If only two species are involved, the calculation is made by multiplying the 
loss per thousand feet on the inferior species by the percentage that species is 
of the total cut, and then dividing the product by the percentage of the total 
cut which will be of the better species. The result is the amount to be taken 
from the indicated price per thousand for the more valuable species. 

Trade Valuation of Inferior Species. 

The stumpage rates placed upon inferior species should be checked by trade 
practice and valuation. Consistent and practical results are desired, con- 
forming as far as possible with the rating of such timbers by local operators. 
Standard prices for low-grade species representing the operator's valuation 
and not below the mininunn rate mav be used throughout a region if found 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 45 

to be most practicable and satisfactory. In any event the prices of the better 
timbers must be adjusted to yield the total margin for profit and risk called 
for by the appraisal. 

Stumpage Prices for Special Products. 

The methods of appraisal previously discussed should be used where the main 
products of an operation are other than lumber, as shingles, crossties, poles, or 
mine timbers. Average selling prices will be determined for the product in 
the form in which the usual operator disposes of it, as manufactured shingles, 
hewn or slabbed ties, etc., and operating costs back to the stump, depreciation 
and profit margin estimated. Rates of margin for profit and risk similar to 
those discussed for saw-log sales should be allowed in operations of similar 
size, conditions of accessibility, operating difficulties, and risks, except where 
other rates have been indicated. (See p. 41.) 

Stumpage rates for special products should be based as far as possible upon 
the unit of measure common in local trade, as the piece in case of poles and 
crossties, the linear foot for mining timbers, the stacked cord for shingle bolts 
or fuel, etc. 

APPRAISALS FOR SMALL SALES. 

Small Operations Irregular. 

Small operations are seldom as closely organized and well supervised as those 
of good size and permanence. Equipment is usually less efficient, capital in- 
adequate, and labor frequently unskilled and transient. Costs are hence least 
uniform in small operations and nearly always higher. Care must be taken 
in such appraisals not to impose impracticable standards, but to figure on the 
level of the conditions found in that region for that type of operations. 

.Appraisals Based on Methods in Use. 

It is the policy of the Forest Service to base appraisals in small operations 
mpon the methods of logging and manufacture actually employed, even if com- 
paratively inefficient. As far as practicable, small mills should be classified by 
•output and average costs determined by classes, which cover existing conditions 
as to character of labor available, amount of capital upon which the business 
is run, and the kind and efficiency of equipment. 

Such average costs may be used in appraisals when desirable with only such 
valuations as the particular conditions on each chance require. 
Xnmber Prices. 

The lumber prices used in such appraisals will similarly be the local prices 
actually obtained by these small operators, unless the region is so isolated 
that outside timber does not compete with the National Forest timber. In the 
latter case, the lumber price should be based upon the rates obtained for sim- 
ilar material in other portions of the National Forest district where compet- 
itive conditions exist. 

Small Operations Competing in General Markets. 

For small operations whose product is sold in general markets in competition 
with large plants the average lumber prices prevailing in such markets will 
necessarily be taken as the basis of appraisals. The grade and quality of the 
product, which is usually poorer than lumber manufactured by large mills, 
should, however, be considered. Otherwise the policy indicated above as to 
efficiency of methods and labor and scale of profits will be followed. 

As indicated under " Size and type of plants," page 9, investments will be 
■estimated and appraisals made on the basis of small operations wherever it is 
practicable for them to handle the timber. 



46 APPEAISIXG STUMPAGE ON NATIONAL FORESTS. 

If larger operations are clearly more practicable and logical, however, and the 
timber has been appraised accordingly, the resulting prices must be paid by any 
purchaser who takes the stumpage. Two standards of value obviously can not 
be set for the same material. Under such circumstances no concessions to the 
inefficiency of the small operator can be made. 

Schedules of Prices for Small Sales. 

District foresters may authorize supervisors to establish schedules of stumpage 
prices for specified parts of their Forests to be used in small sales. This should 
be done only where conditions are so generally uniform that differences in 
intensive appraisals of the various sale areas involved would be slight. Such 
schedules should be worked out under the Supervisor's direction in accordance 
with the methods described in these instructions, by the use of average selling 
prices, logging costs, and investments. 

SAFEGUARDS AND CHECKS. 

Check by Appraiser's Judgment. 

As indicated on page G all appraisals should be checked by the judgment and 
business sense of the appraiser. The prices actually recommended should be 
plainly stated, with the considerations on which they are based, as well as the 
rates obtained by strict application of these instructions. 

Check by Money Margin per Thousand Feet. 

The dollars and cents profit per thousand feet is a direct and tangible check 
which should always be used. Viewing the timber, the chance, and the invest- 
ment in a broad way, and comparing them with corresponding operations, the 
appraiser should satisfy himself as to the fairness and sufficiency of this amount. 

Prices Bid in Former Sales. ^' 

Prices bid for timber in previous sales, with due allowance for difference in 
quality, accessibility, and other telling conditions, also afford an excellent check. 
As far as practicable their fairness should be gauged by observation of the suc- 
ceeding operations. Bid prices are of sijecial value as checks, because indicating 
just what local operators, under all the conditions involved, National Forest sale 
regulations included, are willing to pay for stumpage. As a general rule, the 
rate of margin for profit and risk indicated by current bids should govern 
appraisals in timber comparable in quality and accessibility. 

Current Stumpage Appraisals. 

Uniform stumpage rates for timber of the same general quality and accessi- 
bility in a given region stabilize the sales business and promote the confidence 
of purchasers. They also afford an excellent check against hasty or erroneous 
appraisals. Prevailing prices should never be applied to the ignoring of the 
quality of the timber and the production costs on a particular chance. The 
appraiser should, however, check his results by the going and accustomed rates 
for the general type of stumpage and location, and satisfy himself that any 
departures are justified. Points of this nature should be covered in appraisal 
reports. 

Prices of Private Timber. 

A further check is afforded by the rates at which private commercial stumpage 
is held or sold. When owned by tiniberrnen, who know its worth, particularly 
in regions where buying is active, the price of privately owned stumpage repre- 
sents the consensus of business judgment as to the sum total of all factors, fluctu- 
ating lumber markets, reasonable profits, and logging risks included. Care must 
of course be exercised to consider timber which is comparable in quality and 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



47 



availability aud to take only prices obtained by owners who are able to secure 
full value. Another point of great importance, particularly in comparisons 
between large tracts, is that, in the case of privately owned timber, carrying 
charges for interest and taxes in effect double the investment every ten years. 
Under National Forest sales, with no taxes, no interest on deferred payments, 
and deposits for stumpage only in small installments in advance of cutting, no 
such increase in the initial hivestment takes place. This may be offset by the 
gain to the private owner from increasing values of lumber which is only 
realized in part by the operator under a National Forest contract. As a gen- 
eral rule, however, private stumpage in large blocks is worth less than similar 
stumpage on a National Forest. 

Small sales of privately owned timber, purchased under competitive conditions 
for immediate operation, serve as excellent checks on the appraised values of 
similar chances of National Forest thnber. 

METHODS OF APPRAISING STUMPAGE; APPLICATION OF 
PRINCIPLES PREVIOUSLY DISCUSSED. 

The application of the principles of appraising stumpage which have been 
discussed is illustrated by the following concrete examples. 

These examples show a wide range in cost of operation. They represent 
different operating and wage conditions. They are given primarily to illustrate 
the application of fundamental principles. Whether or not the costs are 
applicable now is immaterial. No attempt is made to show accurate costs in 
all details, but for the purpose for which they are used they are as satisfactory 
as accurate current figures would be. The costs must be determined on each 
chance by the appraiser. 

SYMBOLS FOR ELEMENTS IN APPRAISALS. 



For convenience in appraisals, the following symbols will be used for various 
elements in the calculation. For uniformity and ease in checking, any symbols 
employed — and their use is entirely a matter of convenience — should conform 
with those given. The symbols are all in terms of one thousand board feet. 



/)= Depreciation. 
P=Margin for profit and risk. 
.4= Average fixed investment. 
W=Working capital. 
y=Residual or wrecking value. 
C= Operating costs. 
M=Maintenance. 
0= General expense. 



r=Taxes and insurance. 
2J=Extra costs of logging 

Service regulations. 
/S= Selling price of lumber. 
Z= Stumpage price. 
Z/C= All logging costs. 
3/c=All manufacturing costs. 



due to 



EXAMPLES OF THE INVESTMENT METHOD. 

In the three examples following, the investment method of computing the 
margin for profit and risk has been used. 

1. A SMALL OPEKATION IN THE ROCKY MOUNTAINS. 

A total stand of 12,610 M feet is available to a central miU site, of which 
9,000 M feet may be cut under the established methods of marking. This con- 
sists of green Douglas fir, 76 per cent; green Engelmann spruce, 22 per cent; 
and merchantable dead timber of both species, 2 per cent. 



48 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



The applicant's mill is at present located 8 miles from the new setting. The 
initial cost of this mill was $6,000. It has been operated 3 years out of a total 
life for small semiportable plants at this type of 10 years. It is therefore 
reckoned as having depreciated one-third and is now rated at $4,000. A cut of 
9,000 M feet will last it 6 years, at which time it will have an approximate wreck- 
ing value of $1,000. The appraisal is therefore based upon an operation of 
6 years. 

The present value of the operator's logging equipment, horses, sleds, lumber 
trucks, harness, tools, etc., is put at $5,000. Its depreciation is figured at the 
rate of $600 per year, leaving a residual value at the end of the operation of 
$1,400. The operating costs for which working capital is required total $12.75 
per thousand feet log scale, or $19,125 for the year's cut.* The bulk of the 
lumber is sold and paid for within six months after felling, the average turn 
of the working capital being four months. On this basis, with a small margin 
for contingencies, working capital is figured at $8,000. 

The investments and depreciations may be summarized in the standard form, 
all investments being made the first year and all depreciations prorated evenly 
over 6 years. 



Item. 



Initial in- 
vestment. 



Yearly de- 
preciation. 



Average 
Wrecking profit- 
value, bearing 
I Investment, 



Logging equipment 

Road construction, 44 miles up creek to mill site, at $300 

Moving mill (Smiles) and setting up 

Clearing logway and improving spring at mill site 

Mill and equipment 

Working capital 

Total 



S5,000 

1,350 

350 

100 

4,000 

■8,000 



1600.00 

225.00 

58.33 

16.67 

600.00 



18,800 



1,400.00 



$1,400 



1,000 
8,000 



10,400 



$3,500.00 

787. 50 

204. 17 

58.33 

2, 750. 00 

8,000.00 



15, 300. 00 



In accordance with the standard policy for such operations, a margin of 25 

per cfent on the average investment will be allowed ; 25 per cent of $15,300 is 

$3,825. This, with the yearly depreciation of $1,400, makes a total of $5,225 to 

be prorated over the annual cut. The equivalent charge per thousand feet log 

$5,225 
scale is . 5qq^j or $3.48 per thousand feet. Two dollars and fifty-five cents of 

this amount is margin for profit and risk and 93 cents depreciation. 

The logging costs may be summarized as follows, all in thousand board feet 
log scale: 



Item. 


C. 


M. 


G. 


T. 


R. 


Total. 


Felling and bucking 


$1.10 










$1 10 


Brush piling and burning 








$0.40 
.05 


.40 


Felling* snags " 










.05 


Construction of logging roads 


.25 
1.60 
1.50 








.25 


Skidding 










1.60 


TTanling fn "lill , , 










1.50 


UpkeeiT of logging equipment 


$0.10 








.10 


Supervision 




$1.66 






1.00 


Taxes 






$0.02 




.02 












Total 


4.45 


.10 


1.00 


.02 


.45 


6.02 







* This includes an assumed stumpage rate of $3, all logging costs except supervision, 
and all milling costs extended to log scale by 10 per cent oevrrun. The supervision charge 
is, in this instance, a return to the operator himself, coming at the end of the year or 
whenever a surplus accumulates. It need not, therefore, be covered by working capital. 
The transportation charge from mill to market is also eliminated, since it is incurred just 
prior to sale and can be assumed fairly as paid by a portion of the product. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



49 



Logging roads are short, used for the most part less than one year. It is 
therefore simpler to charge the cost of their construction to operating expenses 
rather than to fixed investment. 

Supervision is inserted to cover the personal services of the operator. This 
is based upon an annual salary of $1,500 spread over the cut. Although in fact 
applying to the whole operation, it may as conveniently be charged against 
logging as split between logging and milling. This charge is higher per thou- 
sand feet than in a large, efficiently organized operation. Its inclusion is 
necessary, however, to provide adequately for the element of personal initia- 
tive and enterprise in a sale of this character. 

Taxes are obtained as a 1 per cent valuation of the average investment in 
logging equipment prorated over the annual cut. This is based upon an assess- 
ment of one-third of the actual value and a levy of 3 cents on the dollar. 

Milling costs may be summarized likewise, per thousand feet lumber tally, 
with the total extended to log scale. 



Item. 


c. 


M. 


T. 


Total. 


Milling (including savving, edging, surfacing 25 per cent of cut, and piling). 


$4.00 






$4.00 


SO. 20 


"io.'oi' 

.06 


.20 






.04 








.06 




2.50 




3.50 










Total 


6.50 


.20 


.10 


6.80 




7.48 













The figure of $4 for milling is the average of 4 mills of this general type and 
output in the region. 

Mill taxes are computed, like logging taxes, as 1 per cent of the average value 
of the property. This includes 330,000 feet of lumber, or two months' cut,* 
which is assumed to be carried steadily on hand. Insurance is figured as a 2 
per cent premium on three-fourths of the average value of mill and yard 
stock.* 

Selling costs are included in the supervision item of $1, this part of the 
work being handled by the operator personally. 

The lumber is marketed in an agricultural valley, the distributing point being 
approximately 7 miles by wagon haul from the mill. Seventy-five per cent of 
the cut of green timber of both species is sold in the rough as boards and dimen- 
sion stock, at a delivered rate of $16. Twenty-five per cent is surfaced for 
finish and sold at a delivered rate of $24. The average lumber selling price of 
green timber is thus: 

75 per cent rough and dimension, at $16 $12 

25 per cent finish, at $24 6 

Average selling price 18 



5 It is assumed that the mill will operate 10 months in the year, cutting 150,000 feet of 
logs per month, or figuring overrun at 10 per cent, 165,000 feet of lumber. 

* The average value of the mill used in calculating taxes and insurance is $2,750, the 

average interest-bearing Investment. The value of the yard stock of 330,000 feet Is : 

Assumed stumpage rate, $3, and logging costs, exclusive of supervision, $5.02, both 

$8 O'' 
reduced to mill-tally basis; that is |j^=$7.29; together with milling costs, $4.20. 

The latter exclude taxes, insurance, and haulage. The total of $11.49 times 330,000 
makes the avei'age yard stock worth $3,791.70. 



50 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

Dead timber is all cut into rough boards. On account of stain and check, it 
commands a lower price than green, averaging $15 per thousand feet. The 
stumpage averages 16 logs per thousand feet. With a circular saw of one- 
fourth inch kerf and relatively inefficient methods of manufacture, overrun 
can not be placed conservatively at more than 10 per cent. 

The average lumber selling prices extended to log scale are thus: 

For green timber ($18X1.10) $19.80 

For dead timber ($15X1.10) 16.50 

Stumpage rates may then be determined by the fornmla, X=S — Lc—Mc—D—P, 
all in terms of log scale, as follows : 

For green timber : $19.80— $6.02— $7.48— $0.93— $2.55— $2.82. 

For dead timber : $16.50— $16.98, as above, = —$0.48. 

Putting a minimum price of 50 cents on the dead stumpage, the total amount 
which must be carried by the green timber to offset the loss on the dead and 
allow the minimum stumpage of 50 cents per thousand feet is as follows : 

^Q(." — =0.02 per thousand to be taken from the indicated price of green 

timber. 

Hence the final prices become : For dead timber, 50 cents i^er thousand feet ; 
for green timber, $2.80 per thousand feet. 

The total return of the operator under this calculation is $1 for supervision 
(personal services) and $2.55 on his investment, or $3.55. This is deemed 
equitable for small operations of this type. 

2. A MIDDLE-SIZED OPERATION IN THE BLUE MOUNTAINS. 

This chance will cut approximately 80,000,000 feet. Eighty per cent of the 
stand is yellow pine, the remainder Douglas fir and western larch. The opera- 
tion is planned for 10 years at an annual cut, log scale, of 8,000,000 feet. 

The central point of the business is on a trunk line railroad where the 
planing mill is located. It has a rated value of $15,000. It will be well main 
tained with a view to succeeding operations and should have a residual value 
of $10,000 at the end of the sale. From this central point an existing common 
carrier railroad, forming a tap line or feeder for the main system, runs near 
the chance. It is proposed to build a single band mill, with a capacity of 40,000 
feet of lumber daily, on the sale area. It will cost $30,000 and have a residual 
value of $10,000 at the end of the operation. Freight on green rough lumber 
between these points is equivalent to $2.50 per thousand feet. 

Five miles of railroad connecting the mill with the tap line and running 
up into the woods will be used during the entire operation. Its estimated cost 
beneath the steel is $1,900 per mile. In addition, the following branches will 
be required: (1) A lateral 2 miles long, to be used 2 years; (2) a lateral 5 
miles long, to be used 5 years; (3) short spurs, totaling 12 miles, to be used 
on the average 1 year. These laterals and spurs will cost on the average $1,200 
per mile beneath the steel ; 9 miles of steel all told will be required, This will 
cost $2,200 per mile, and is estimated to be worth half that amount at the end 
of the operation. 

One light engine with gypsy loader and rolling stock, costing all told $12,000, 
are required for log hauling. Their residual value is estimated at $3,000. 

For logging to rail, eight teams will be required. Their cost with harness 
is $400 each. Skidding equipment will cost $2,000. The maintenance charge on 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



51 



teams and skidding outfits will necessarily be heavy, amounting to $800 a year. 
With this expenditure for maintenance, however, the value of the equipment 
v^all be kept close to its initial cost. Its residual value may therefore be 
reckoned at $3,000. 

Further items of investment may be listed as follows: 



Item. 



Wood camps 

Shop and tools 

Woods and track tools 
Working capital 




Residual 
value. 



S500 



35,000 



The working capital is computed as follows : Current costs for logging and 
stumpage will be turned every four months. These aggregate $6.28, including 
an assumed stuiupage rate of $3 for pine (80 per cent) and $1 for fir and larch 
(20 per cent). The freight and milling costs, which average $8.53, log scale, 
for all species, are turned every two months. The working capital required 



is thus 



8 28 $8 53 

^ — I — i — or $3.51 for each thousand feet, log scale, in the year's 



cut. On 8,000,000 feet this amounts to $28,080. Twenty-five per cent has been 
added as leeway for contingencies, making the total $35,000. 
The investments and depreciations may be summarized as follows : 



Item. 



Planing mill 

Sawmill 

Railway steel 

Main logging railaay grade 

First lateral railway grade 

Second lateral railway grade 

Spur railway grades 

Engine, loader, and rolling stock 
Teams and skidding equipment . 

Camps 

Shop and tools 

Woods and track tools 

Working capital 

Total 



Initial 
investment. 



$15,000 

30,000 

19, 800 

9,500 

2,400 

6,000 

14,400 

12,000 

5,200 

2,000 

1,500 

500 

35,000 



153, 300 



Number 

of years 

used. 



Aimual 
deprecia- 
tion. 



$500 

2,000 

990 

950 

240 

600 

1,440 

900 

220 

200 

100 

50 



8,190 



Residual 
\mlue. 



$10,000 
10,000 
9,900 



3,000 
3,000 



500 



35,000 



71,400 



Average 
profit-bearing 
investment. 



$12,750 

21,000 

15,345 

5,225 

360 

1,800 

1,440 

7,950 

4,210 

1,100 

1,050 

275 

35,000 



107,505 



The average investment at work in the operation and entitled to profit is thus 
$107,505. Former competitive bids for timber in this region, which is relatively 
accessible and involves but average risks, and for chances which are comparable 
in size and permanency of the operation indicate that a return of 18 per cent on 
the investment is a fair going basis for sales of National Forest stumpage. At 
this rate the annual profit (18 per cent of $107,505) amounts to $19,350.90, or 
$2.42 per thousand feet, log scale. 

$8,190 



The annual depreciation charge is 
scale. 



8,000 M 



or $1.02 per thousand feet, log 



52 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

The operating costs are estimated as follows : 

Logging per 1,000 feet log scale. 



Item. 


C. 


M. 


G. 


T. 


R. 


Total. 


Felling and bucking 


$0.80 










$0.80 


Brush disposal 








$6.46 

.04 


40 


Felling snags 










.04 


Yarding 


1.10 
.30 
.30 








1.10 


Landings and grading 










.30 


Railroad operation .." 










.30 


Maintenance of teams and skidding equipment 


SO. 10 
.15 
.20 








.10 


Railroad maintenance 








.15 


Maintenance of rolling stock i 








.20 


Supervision ". 1 


$0.25 






.25 


Taxes on logging equipment 1 






$6.02 
.02 




.02 


Liability insurance - 




.02 










Total 1 


2.50 


.45 .25 


.04 


.44 


3.88 



Manufacture and transportation per 1,000 feet lumber tally. 



Item. 


C, 


M. 


G. 


T. 


Total. 


Sawing in rough and piling on cars at sawmill 


$1.90 








$1.00 


Maintenance of sawmill 


$0.20 






.20 


Freight to main line railroad 


2.50 

2.10 

.60 






2.50 


Planing and finishing (yellow pine) 









3.10 










.60 


Maintenance of planing mill .". 


.10 






.10 


Supervision of sawmill and planing null , 




$0.20 


"io.'oe" 

.01 
.07 


.20 


Taxes on saw mill, planing mill, and yard stock i 






.06 


Liability insurance! '. ". 








.01 


Mill and lumber insuA,nce i 








.07 


Selling costs 






.30^ 


.30 










Total 


7.10 


.30 


.50 


.14 


8.04 







I In these items the average yard stock carried at the planing mill is put at 1,200,000 feet of pine and 300,000 
feet of larch and fir. Pine is credited with an average cost of $13.67, and larch and fir with an average cost 
of S10.45. These are based upon (1) assumed stumpage rates of $3 for pine and SI for larch and fir, (2) log- 
ging costs of $3.68 and (3) milling and transportation costs of S7.60 and $6.20, respectively. Stumpage 
charges and logging costs are reduced for 10 per cent overrun. Milling costs are exclusive of taxes, insur- 
ance, and selhng charges. 

Not more than 20 per cent of the larch and fir lumber is dressed as compared 
with 60 per cent of the pine lumber. The average cost of planing and finishing 
larch and fir is therefore 70 cents per 1,000 feet on the total of these species. 
The total cost of manufacture and transportation in the case of larch and fir is 
therefore $1.40 less than for pine, or $6.64. 

This timbej; runs from 8 to 10 logs per 1,000 feet. Results obtained in current 
sales, however, indicate that an overrun exceeding 10 per cent can not be used 
safely in stumpage appraisals in this locality. Extended for this overrun, the 
milling and transportation cost for yellow pine, log scale, is $8.04X1,100, or 
$8.84; and for larch and Douglas fir, $6.64X1,100, or $7.30. 

From study of current manufacture of similar timber in local mills and com- 
pilation of selling prices during the past two years, the average cut and selling 
price of yellow pine, by grades, are ascertained to be as follows : 



APPRAISING STUMPAGE ON NATIONAL, FORESTS. 



58 



Grade. 


Per cent of 
cut. 


Grade price. 


Weight in 

average 

price. 


B select and better 


2 
8 
15 
20 
25 
20 
5 
5 


$46.00 
34.00 
24.00 
16.00 
12.50 
14.00 
12.00 
10.00 


$0.92 


C select 


2.72 




3.60 




3.20 


No. 3 shop 


3.12 


No. 1 common 


2.80 




.60 


No. 3 common. 


.50 






Total . 


100 




17.46 









The average cut and .sellint? price of western larch and Douglas fir, hy grades, 
have been similarly ascertained to be approximately as follows : 



Grade. 


Per cent of 
cut. 


Grade price. 


Weight in 

average 

price. 




6 
54 
40 


S16.00 
12.00 
10.00 


$0.99 


No. 2 common. ".', 


6.48 


Nn .3 coTnTnon. . 


4.00 






Total 


100 




11.44 









Extended by 10 per cent overrun, the average selling prices, log scale, are : 
For yellow pine, $17.46X1,100, or $19.21. To this should be added $0.30, the 
net return per thousand feet log scale from the sale of slabwood (0.5 cord per 
thousand at $0.60). 

For larch and Douglas fir, $11.44X1,100, or $12.58. 
The stumpage rates may now be calculated as follows: 
For yellow pine: 

Average selling price $19. 51 

Depreciation $1.02 

Margin for profit and risk 2. 42 

Logging 3. 68 

Slanufacture and transportation 8.84 

Total 15. 96 

Balance for stumpage 3.55 

For larch and Douglas fir: 

Average selling price 12.58 

Depreciation 1.02 

Margin for profit and risk 2. 42 

Logging 8. 68 

Manufacture and transportation 7. 30 

Total 14. 42 

Deficit 1. 84 

With the established minimum rate of 50 cents per thousand feet for larch 
and Douglas fir, the total deficit of*$2.34 on these species may be distributed on 
the pine stumpage as follows: 

A OA =appi'oximately $0.58 to reduce the stumpage of the yellow pine. 
0.80 



54 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



The final stumpage rates are: 

Per M, 

Yellow pine ($3.55— $0.58) $2.97 

Larch and Douglas fir .50 

Prorating the annual charge for depreciation and profit on net value instead of 
quantity, in accordance with the principles discussed on page 42 stumpage 
prices by species are obtained as follows : 

Deducting operating costs only from average selling prices, the margin is : 
For yellow pine, $6.99 per thousand feet, log scale; for larch and fir, $1.60 per 
thousand feet, log scale. 

With a yearly cut of 6,400,000 feet of pine and 1,600,000 feet of larch and fir, 
the total margin is $47,296. The sum of yearly depreciation and profit margin 
is $27,541. Dividing the latter figure by the former, it is ascertained that each 
dollar of margin must pay $0,582 toward depreciation and profit margin. On 
yellow pine, therefore, these charges amount to $4.07 per thousand feet, leav- 
ing $2.92 for stumpage. On larch and fir, they amount to $0.93 per thousand 
feet, leaving $0.67 for stumpage. The average price is the same as that obtained 
under the first computation. The second method is to be preferred as more 
logical and less arbitrary. 



3. A LARGE OPEBATION IN THE IDAHO PANHANDLE. 

This chance is estimated to cut, under Service methods of marliing, 600,000,000 
feet in a 20-year operation. The timber consists of the following species : 



Per cent. 

Western larch and Douglas fir 33 

Western red cedar 25 

White fir 7 



Per cent. 

White pine 27 

Yellow pine 4 

Lodgepole pine 1 

Engelmann spruce 3 

The chance is exceptionally adapted to railroad logging. From a central 
point, where the system of logging spurs would logically begin, the most prac- 
ticable route to the nearest railroad connections requires 32 miles of track. The 
first 20 miles of this distance taps a region of extensive agricultural resources. 
Behind it lies a heavily timbered belt which contains upward of 6,000,000,000 
feet. There is little doubt that permanent traffie in timber and agricultural 
products will maintain this portion of the railroad as a common carrier, and 
that considerable freight outside of the National Forest sale will contribute to 
its support from the outset. 

The cost of this portion of the railroad is estimated at $20,000 a mile. Two- 
fifths of the total expenditure of $400,000 will be made two years, and three- 
fifths one year in advance of the beginning of the operation. Including interest 
on these amounts, for two and one years, respectively, at 6 per cent, the initial 
investment is computed as $433,600. This investment does not depreciate, but 
with adequate charges for maintenance remains intact throughout the opera- 
tion. The permanent traffic then available will give it a residual value equal 
to the first cost. 

In the stumpage appraisal this tap-lme railroad may be treated in either of 
two ways. 

First, it may be handled as an integral part of the operation, like other in- 
vestments. In that case, because of its permanency and low risk, a return of 
10 per cent annually is believed to be equitable. It is but fair, furthermore, to 
charge a portion of this return to the outside traffic available for the road. 
It is the appraiser's judgment that such outside traffic during the sale period 



APPRAISING STUMPAGE ON NATIONAI^ FORESTS. 55 

as a wliole should net $25,000 a year over and above its proportionate share of 
the cost of rolling stock, operation, and maintenance. This leaves $18,360 as 
the annual charge for profit on the tap line to be borne by the National Forest 
stumpage, in addition to its portion of the cost of operation, maintenance, and 
rolling stock. 

Second, the tap line may be regarded as an independent business enterprise. 
In this case its only relation to the timber sale is as a common carrier which 
will transport the product on a freight-tariff basis. A freight-tariff, under this 
assumption, is thus substituted for the combined chargers for rolling stock, 
operation, maintenance, and profit under the first assumption. In comparison 
with other railroads making similar hauls, the freight rate is figured at 55 
cents per thousand feet of logs, log cars being furnished and maintained by the 
shipper. 

The remaining 12 miles of railroad will be a logging road primarily, but will 
tap fully as much private as Government timber. From careful study of the 
location and ownership of this timber, it is concluded that to prorate the cost 
of the logging railroad three-fifths to the National Forest chance and two-fifths 
to adjacent private stumpage will be safe and equitable. The cost of this 
main logging road, or feeder, including steel, is put at $6,000 per mile. The 
Initial investment, $43,200 of which is to be carried by the Government timber, 
will be fully depreciated during the 20-year period allowed for the operation. 
The average investment in the feeder should return the same profit allowed 
for the capital used in the operation as a whole. 

The best location for a manufacturing plant is 92 miles from the chance, at a 
good-sized valley town. The low elevation, making conditions for seasoning 
lumber and continuous operation of the mill much more favorable, and better 
facilities for railroad shipments more than offset the distance from the timber. 
This location will require a log haul of 60 miles from the end of the tap line 
over an existing railroad, at a quoted charge of 80 cents per thousand feet log 
scale, with cars furnished by the shipper. 

The manufacturing site is estimated to cost $25,000. This will be a perma- 
nent investment, in a rapidly growing town, subject to no risk and with every 
prospect of appreciation in value. As in the case of the tap line, therefore, 
no depreciation will be figured and a return of 10 per cent throughout the life 
of the sale will be adequate. With an annual cut of 30,000,000 feet, this will 
amount to approximately 8 cents per thousand feet, log scale. The plant itself, 
a double-band sawmill and planing mill, will cost $255,000. The location is 
one of the most permanent to be found anywhere in the West, in a large valley 
whose drainage contains upward of 80,000,000,000 feet of virgin timber. It 
can be fairly assumed, therefore, that the plant will have a life of at least 
30 years, or a residual value at the end of the present operation of $85,000. 

The tract will be logged by railroad spurs extending from the end of the feeder 
up each of its three main watersheds. Three miles of main logging spur will de- 
velop the first watershed, which will furnish about four years' cut at 30,000,000 
feet of logs annually. Three miles of main spur must then be constructed 
to the junction of the second and third watersheds, each of which will furnish 
about eight years' supply of logs. An extension of the main spur 9 miles up 
each of these streams will be necessary. Approximately 58 miles of branch 
spurs will be required on the three watersheds. These branches can, however, 
be operated with 8 miles of steel in continuous use. The logging will require 
therefore, 3 miles of steel for the main logging spurs during the first four years, 
thereafter 12 miles ; and 8 miles of steel for the branch spurs throughout the 
entire sale. Seventeen and one-half per cent of the timber, on agricultural 
Hands which are to be cut clean, will be logged by steam machinery. The rest 



56 



APPRAJSING STUMPAGE ON NATIONAL FORESTS. 



will be logged with horses. Woods improvements will consist of trail chutes 
and a few short pieces of flume. 

The investments required in the operation, aside from the tap line and mill 
site, are summarized in the following table: 

Summary of mvestments. 



Item. 



Manufacturing plant , 

Main logging railroad , 

Main logging spurs; i 

3 miles steel, at $3,090 

3 miles grading, at $1,500 

9 miles steel, at $3,090 

3 miles grading, at $1,600 

9 miles grading, at $1,600 

9 miles grading, at $1,500 

Switch layouts 

Branch logging spurs: 

8 milessteel, at $2,300 

58 miles grading, at $1 ,200 

Logging and railroad equipment: 3 

4 donkey engines, at $7,500 

120 sets teams and outfits with woods 

tools, at $700 

7 locomotives, at $12,000 ' 

300 log cars, at $500 ^ 

6 log jammers, at $5,000 

Miscellaneous equipment: 

Portable railroad camps « 

Log camps 

Railroad shop and equipment 

Working capital 8 



Initial in- 
vestment. 



Total. 



$255, 000 
43,200 

9,270 

4,500 
27,810 

4,800 
14,400 
13,500 

1,000 

18,400 
69,600 

30,000 

84,000 
84,000 
150,000 
30,000 

6,000 

9,000 

2,000 

220,000 



1, 076, 480 



Number of 
years used 



Annual 
deprecia- 
tion. 



$8,500 
2,160 

463 
225 
1,112 
240 
720 
675 
50 

920 
3,480 

1,500 

4,200 
4,200 
7,500 
1,500 

300 
450 
100 



Besidual 
value. 



$85,000 



5,562 



38,295 



220,000 



310,562 



Average 
profit- 
bearing in- 
vestment. 



$174,250 
22, 680 

4,S66 
562 
13, 905 
2, 040 
3,240 
3,037 
525 

9,660 
5,220 

8,250 

12,600 
23,100 
41,250 
8,250 

1,650 

1,125 

1,050 

220, 000 



557, 260 



1 All items for railroad steel and iron are depreciated at 5 per cent annually. 
' Two years is the average period of use of each spur grade. 

3 The initial investments include replacements throughout the life of the sale. Logging machinery, 
locomotive-, and rolling stock depreciate completely in 10 years; hence double the average stock in use at 
any given time is figured. Teams and tools depreciate completely in 5 years; hence four times the average 
stock is provided for. 
* Three locomotives will be sufficient for the first 10 years; for the last 10 yeras four will be needed. 
i This is based upon log transportation for the entire distance over tap line and present railroad to the 
manufacturing plant, requiring 150 cars in continuous use. 
6 Two complete sets, at $3,000 each and each lasting 10 years, are provided for. 
' Four years is the average period of use of the log camps. 

8 The working capital is arrived at as follows: It is estimated that an average yard stock equivalent to 
about one-third of the annual cut must Vje kept on hand. This has a cost value, excluding depreciation 
and profit and including an assumed average stumpage price of $1.50, of $12.99 per thousand feet log scale 
(taking the lower schedule of costs, p. 58). It is also figured that an average supply of 3,000,000 feet of logs 
should be kept ahead of cutting at the mill, and 2,000,000 feet of logs ahead of railroading in the woods . 
The cost value of the former is $7.59, and of the latter. $5.03. Stumpage at $1.50 is included in each case. 
Accoimts receivable are estimated at $32,475. This is equivalent to one month's sales, 2,500,000 feet, at a 
cost value of $12.99. While many sales will be made on 60-day payments, it is beheved that they will be 
otfset by an equivalent amount of cash business. The average outstanding deposit for stumpage is put at 
$5,000: and the average amount required as a margin to meet contingencies at $20,000. These items are then: 

10,000,000 feet of yard stock, at $12.99 $129,900 

3,000,000 feet of logs at mill, at $7.59 '. 22, 770 

,2,000,000 feet of logs on landings, at $5.03 10, 060 

Accounts receivable 32, 475 

Running deposit on stumpage 5, 000 

Contingencies 20, 000 

Total 220,205 

This mav be checked from the total yearly operating cost and frequency of turn. The cost of the year's 
cut, exclusive of depreciation and profit, is $389,700 (30,000,000 at $12.99). This would indicate an average 
turn of about seven months — which is liberal but not excessive for a large operation of this nature. 

This operation involves the development of a manufacturing and logging in 
dustry in an entirely new region and tlie exploitation of a chance now wholly 
inaccessible. Risks beyond the ordinary are involved in : 

1. Climatic conditions, no large operations or extensive construction work 
having been conducted lieretofore in these mountains. 

2. Acquisition of additional timber to carry two-fifths of the investment in 
the main logging railroad. 



APPRAISING STUMPAGE ON NATIONAL, FORESTS. 



57 



3. Working out successfully in the main transportation problem which in- 
volves (1) satisfactory traffic and log haul agreements with an established 
common carrier, and (2) enlisting other capital to construct the tap line or de- 
veloping outside traffic to carry the tap line if built as part of the lumbering plant. 

Under these conditions a return of 20 per cent annually on the invested 
capital is deemed equitable and necessary to place the chance upon the market. 

With an average investment of $557,260, the annual charge for profit margin 
is thus $111,452; or, on an annual cut of 30,000,000 feet, $3.71 per 1,000 feet. 
The annual charge for depreciation is $1.27 per 1,000 feet. 

The logging costs are summarized as follows : 

Stump to upper terminus of tap line. 



Item. 


C. 


M. 


G. 


T. 


R. 


Total. 




JO. 70 
1.55 










SO. 70 












1.55 










SO. 55 
.02 


.55 












.03 




.21 

.20 
.36 








.21 












.20 












.30 




$0.11 
.27 
.10 








.11 












.37 












.10 










.12 


.12 










$0.15 


.15 








80.40 


.40 














Total 


3.02 


.48 


.40 


.15 


.69 


4.74 







1 Based upon 17J per cent power logging at $1.22 and S2i per cent horse logging at $1.63. 
' This is a special silvicultural requirement proposed for the sale area. 

' This charge covers trail chutes, flumes, landings, and other current improvements aside from railroad 
grades, which are provided for under under fixed investments. 

The cost of manufacture and sales, exclusive of depreciation, has been aver- 
aged for a number of large mills in the Inland Empire similar to the proposed 
plant at $4.50 per thousand feet lumber tally. Mill scale studies conducted 
at these plants indicate that 20 per cent is a conservative figure for overrun 
under Forest Service scaling in this class of timber. The milling charge per 
thousand feet log scale is thus $4.50X1,200, or $5.40. 

If the appraisal is based upon the assumption that the tap line can be con- 
structed practically as a common carrier independent of the lumbering opera- 
tion, the only other charges to be taken into account are for freight on logs to 
the manufacturing plant, aggregating $1.35 per thousand feet log scale. 

If it is assumed that the tap line must be built by the lumbering company 
as part of the operation, under the conditions above stated, additional charges 
are necessary, as follows: 

Profit margin on portion of tap line investment'' $0.61 

Depreciation of additional rolling stock required * . 08 

Profit margin on average investment in additional rolling 

stock ' . 09 

Railway operation ' . 25 

Railway maintenance* .10 

Maintenance of additional rolling stock . 04 

Total 1. 17 

''$18,360 prorated annually over 30,000,000 feet. (Seei top of page 55.) 
■^ The additional equipment required is 2 engines in current use. Their depreciation, 
at 10 per cent aanually, and average investment are figured as $2,400 and $13,200, 
respectively. A profit margin of 20 per cent is allowed on the latter figure. 

'■> These are the estimated proportions of the total costs of operation and maintenance 
chargeable to the timber. .(Bee pp. 54 ajid 55.) 



58 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



The charge for log freight from the end of this tap line to the mill is 80 cents 
per thousand feet in any event. 

Profit margin and production cost, exclusive of stumpage price, may then be 
summarized as follows: 



operation. 1 »' "f™" 



Return on investment in mill site 

Margin for profit and risk 

Depreciation 

Logging costs 

Milling costs 

Tap-line transportation 

Main-lme transportation 

Total 



SO. 08 
3.71 
1.27 
4.74 
5.40 
1.17 
.80 



$0.08 
3.71 
1.27 
4.74 
5.40 
.65 
.80 



17.17 



16.55 



Where different methods of handling the main transportation problem should 
"be considered, as is frequently the case in inaccessible chances, it is desirable for 
the appraiser to present the cost data under each. In this instance the choice 
obviously lies between a more and a less conservative policy as to whether the 
sale of National Forest stumpage should await the general economic develop- 
ment of the region or whether the Government timber should itself carry the 
principal burden of such development. Ordinarily the more conservative policy 
will be followed under such conditions. Stumpage prices will be based, there- 
fore, upon the lower schedule of costs. 

The average selling value of the white pine has been determined by the 
following table: 



Grades. 


Per cent 
of total. 


Selling 
value. 


Weighted 
value. 


B Select 


5 
4 

6 
3 
30 
24 
15 
8 
5 


S45 
38 
27 
20 
25 
21 
15 
11 
6 


S3. 35 


C Select 


1.53 


D Select 


1.63 


Shop 


.60 


No. 1 Common 


7.50 


"No. 2 Oommnti 


5.04 


No. ."? r.fimTnnn . 


3.35 




.88 




.30 






Total 


100 
5 




21.96 


Depreciation in yards 




1.10 








' 


20.86 



This checks very close to the averages actually received by operators manu- 
facturing white pine of similar size and quality. 

The mill-run prices of the other species have been similarly determined, as 
follows : 

Yellow pine $16.87 

Lodgepole pine 15.00 

Engelmann spruce 14.00 

White fir 13.00 

Larch, Douglas flr, and cedar 12. 00 



APPKAISING STUMPAGE ON NATIONAL FORESTS. 59 

In determining the total value of each species log scale, it is figured that in 
addition to an overrun of 20 per cent a net return of 40 cents per thousand 
feet will be obtained for white, yellow, and lodgepole pine from the manufac- 
ture of lath and a net return of 30 cents per thousand feet for all species from 
the sale of slab wood and mill waste. The log-scale values of the respective 
species are therefore : 

White pine, $20.86, extended for 20 per cent overrun $25. 03 

Lath . 40 

Slab wood and mill waste . 30 

25.73 



Yellow pine, $16.87, extended for 20 per cent overrun 20. 24 

Lath . 40 

Slab wood and mill waste . 30 

20.94 



Lodgepole pine. $15, extended for 20 per cent overrun 18. 00 

Lath .40 

Slab wood and mill waste . 30 



18.70 



Engelmann spruce. $14, extended for 20 per cent overrun 16. 80 

Slab wood and mill waste .30 



17.10 



•White fir. $13. extended for 20 per cent overrun 15. 60 

Slab wood and mill waste . 30 



15.90 



Larch. Douglas fir. and cedar, $12, extended for 20 per cent 

overrun 14. 40 

Slab wood and mill w^aste . 30 



14.70 
The total charge for margin for profit and risk and for depreciation, $5.06 
per thousand feet, is prorated over the margin between operating costs and 
selling price of the respective species in accordance with the method discussed 
on page 42.^° The following stunipage prices are obtained : 

Engelmann spruce 1. 35 

White fir 1.06 

Other species . 78 



White pine $3.42 

Yellow pine 2. 27 

Lodgepole pine 1. 74 



'" The average margin Is $6.63 (average selling price, .$18.12, less the operating cost, 

$11.49). ' ' ' „ =$0.76, to be taken from each dollar of margin to make up profit and 

depreciation. The amount left for stumpage is $0.24 of each dollar of margin. With 
this figure and the difference between operating costs and the selling price of each species 
the stumpage rates are readily derived. 



60 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



EXAMPLES OF THE OVERTURN METHOD. 

In the three following examples the overturn method of computing the margin 
for profit and risk has been used : 

1. A SMALL HAKDWOOn OPERATION IN THE SOUTHERN APPALACHIANS. 

The chance is estimated to contain the equivalent of 2,500,000 feet of timber, 
of which 1,500,000 feet is saw timber and the bahince oak ties and chestnut acid- 
wood. The most feasible method of operation is by a small portable mill, which 
will make three sets, in order to reduce the length of the log haul. This type 
of operation in this region is not systematically organized or efficiently handled. 
Tlie mill is sometimes closed down to log or to haul lumber to the market, and 
logging is often discontinued to run the mill or to do other work. With these 
interrupt-ons a period of three years is figured as necessary, with an annual 
cut of 500,000 feet, log scale, of saw logs, and one-third of the total volume of 
the other products. 

The timber will average about 3,000 feet per acre, 2 logs per tree, and 12 
logs per thousand feet. It is sound and of fairly good quality. The following, 
by species, is the estimated amount of timber to be removed : 



M feet, 
log 
scale. 



Tan-bark, 
tons. 



Acid- 
wood, 
cords. 



Ties. 



Chestnut oak 

Chestnut 

Poplar 

Yellow pine 

White and red oak . 
Others 



400 
300 
300 
200 
200 
100 



Total. 



1,500 



600 



1,600 



1,600 



200 



100 
300 



The lumber will he partially air-dried at the mill yard and then hauled 3i 
miles to railroad shipping point where it is sold in the rough. It will require 
<3 teams, 4 wagons, and from 18 to 20 men, working approximately 200 days 
per year, to remove all the products and deliver them to the market. 

The average daily output per crew of sawyers is 3,500 feet, and the average 
amount skidded by one team and teamster is about 2,750 feet. The sawyers 
do most of the limbing, and this accounts for the small output per day. One 
swamper will be required for two skidding teams. The following wage scale 
is used in figuring costs : 



Per day. 

Team and teamster $5.00 

Woods labor___ 2.50 

Sawyer at mill 4.00 



Per day. 

Engineer—'. $3.00 

Ratchet setter 3.00 

Other mill labor 2.50 



A team can make two turns per day from the mill to the market. The roads 
are poor. The average load for each class of product is estimated as follows : 
Lumber, 800 feet ; ties, 12-15 ; acidwood, f cord ; bark, 1 ton. 

The depreciation of improvements is charged to the saw-log material. The 
number of man and team days required to do the logging, manufacturing, and 
hauling the lumber to market are approximately the same as that required to 
handle the ties, bark, and acidwood. For that reason only part of the super- 
vision cost and one-half of the depreciation of equipment, except the sawmill, is 
charged to the logging and milling operations. 



APPEAISING STUMPAGE ON NATIONAL FORESTS. 



61 



The impvoveinents are e.stiiuatetl to cost as follows: 

3 miles of roads ..$30() 

3 sets of temporary camps 1, 200 

3 mill settings 1,000 

Skidways or loading places 150 

$2,650 
Cost per thousand on 1,500 M feet of logs $1.77 

The depreciation of equipment is shown by the following table: 



Item. 


Initial 
cost. 


Life 
(years). 


Annual 
depre- 
ciation. 


Amount 
charged 
to log- 
ging and 
milling. 


Amount 
charged 
to other 
products. 


Sawwill 


$3,000 12 


$250 


82,50 


None. 




2,100 5 : 420 1 210 
600 4 150 1 75 
200 1 , 200 ! 100 
150 3 1 50 ! 25 


1210 




75 


Small tools 


100 




25 






Total 


6,050 




1,070 


660 


410 









The annual depreciation charge against the saw-log material is $660, or $1.32 
per thousand feet, log scale. The remaining depreciation is spread over the 
other products. 

Supervision is figured as three-fourths of one man's time, at $125 per month, 
or $1,125 per year. Twenty-five i)er cent of the time of the' foreman is not 
charged directy to supervision, since he will be engaged in miscellaneous work 
that is accounted for in various co.sts of operation. It will require about $750 
properly to oversee the saw log and milling operations and about $375 to super- 
vise the operation for ties, bark, and extract wood. Supervision charges against 
saw logs and milling are therefore $1.50 per thousand feet, log scale; acid wood, 
50 cents per cord ; bark, 55 cents per ton ; and ties, 3 cents each. 

It will require about seven men to run the mill and pile the lumber. The 
average wage is approximately $2.90 per day, or a daily labor cost of $20.30. 
Based on a cut of 6 thousand feet per day, the cost per thousand feet, lumber 
tally, is approximately $3.40. 

The overrun for 12-log timber, with this type of circular mill, is placed at 
10 per cent. 

Tlie estimated cost of operation for lumber, from stump to f. o. b. cars, 
including depreciation, is shown in the following table: 

"Per M feet. 

Improvements — logging and milling $1.77 

Depreciation - 1- 32 

Supervision 1. 50 

Felling and buckling, avera{;e of all species" 1. 50 

Swamping and skidding, average of all species" 2. 30 

Loading and hauling, 50%, at $2 " 1. 00 

Brush disposal -60 

" It is recognized that the oaks are more costly to log than the other species. In some 
cases the appraisal should be based on separate costs for oaks and for others. In this 
•case, in view of the small total amount involved, the averages for all species are used. 

'^ Half of the logs will be skidded direct to the mill. 



62 



APPEAISING STUMPAGE ON NATIONAL FORESTS. 



Per M feet. 
Manufacturing per.ai lumber— $3. 40 

Maintenance of mill do .30 

Taxes and insurance do . 50 

Hauling to market" do 3.10 

Loading on cai's do . .50 

7.80 

10 per cent overrun . 78 

$8. 58 

Total cost, log scale ' 18.57 

Margin for profit and risk, at 20 per cent 3. 71 

22.28 

The risk is not great in this case, and for that reason a margin of 20 per cent 
on the cost of operation is considered equitable. 

The average selling value of the lumber in the rough, f. o. b. cars, and the 
computation of the stumpage prices for the saw-log material are as follows: 



Poplar. I Pine. 



White 

and 
red oak. 



Chestnut 
oak. 



Chestnut. 



Others. 



Selling value per M feet . 
10 per cent overrun 



$30.00 
3.00 



$25.00 
2.50 



$27.00 
2.70 



$23.00 
2.30 



$22. 50 
2.25 



Selling value per M feet, log scale. 
Operating costs and margin, log scale. . . 



33.00 
22.28 



Stumpage indicated. 



27.50 
22.28 



29.70 
22.28 



25.30 
22.28 



24.75 
22.28 



10.72 



$31.00 
2.10 



23.10 
22.38 



The operating costs for the other products and appraised values are esti- 
mated to be as follows : 



Cutting and making. 

Skidding 

Hauling 

Loading on cars 

Supervision 

Depreciation 



Total 

Margin at 10 per cent . 



Total cost and margin . 
Market value 



Stumpage indicated . 



Ties. Acidwood 



Each. 
$0.20 
.05 
.20 
.03 
.03 
.03 



.54 
.05 



.59 



.21 



Cord. 

$1.60 

1.00 

3.30 

.30 

.50 

.54 



7.24 
.72 



7.96 
8.50 



.54 



Bark. 



Ton. 

$2.00 

1.40 

3.30 

.80 

.55 

.60 



8.65 
.86 



9.51 
12.00 



A margin of only 10 per cent is allowed on the ties, acid wood, and bark. 
Operators are usually willing to handle these products if they can make better 
than day wages, as has been shown by bids in other sales. 

2. A logger's SAiE IN NORTHERN MONTANA. 



A chance on a drivable stream tributary to the Kootenai River contains 
14,000,000 feet, running 76 per cent yellow pine, 16 per cent western larch, and 
8 per cent Douglas fir. The timber averages from three to four logs to the tree 
and eight logs to the thousand feet. The season of high water is short and no 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



63 



satisfactory drive cau be handled witliout cleaning about G miles of stream bed 
and constructing two splasli dams. The stream has never been driven before. 
With these improvements, it will be practicable to drive from two to four million 
feet annually 6 miles to the Kootenai River. The operation will, therefore, 
extend over four logging seasons. 

About one-fourth of the timber can be skidded directly from the stump to the 
landings. Another fourth can be drayed to the creek over an average distance 
of li miles. AVhere topography is suitable, logs will be skidded short distances 
to chutes and handled through them to the creek. Approximately 30 per cent 
of the timber will be logged in this way. The rest, on account of uphill slopes, 
must be loaded on sleds and hauled to the landings. 

The following investments will be required : 



Item. 



Set of camps for 30 men 

3 miles of drav road, at $400 

1,000 rods of chute, at $2.50 

2 splash dams, at $1,000 

Cleaning 6 miles of stream 

Construction of landings 

Teams, sleds, drays, and woods tools 
Working capital ' 

Total 



Initial 
investment. 



$1,500.00 
1,200.00 
2,500.00 
2,000.00 
1,500.00 
500.00 
5,000.00 
8,000.00 



22,200.00 



Number 

of years 

used. 



Annual 
deprecia- 
tion. 



$375. 00 
300.00 
625.00 
500.00 
375.00 
125.00 
500.00 



2,800.00 



Residual 
value. 



$3, 000. 00 
8,000.00 



11,000.00 



Average 
profit- 
bearing 
investment. 



$937. 50 

450.00 

937. 50 

1,250.00 

937. 50 

187. 50 

4,250.00 

8,000.00 



16,950.00 



1 The logging season covers 5 months, from Nov. 1 to Apr. 1. Loggingcosts, exclusive of breaking rollways 
and driving, total $3.02, and the stumpage price is assumed to be $2. The average cut is 700,000 feet of logs 
per month, mvolving a cost for stumpage and logging of $3,514. It is figured that sufficient capital must be 
furnished to run the camp 2 months, or $7,028, with a margin of $1,000 for contingencies. The logs are 
dehvered in Kootenai River and paid for in May. Driving charges and logging costs for the last 3 months 
of the season can usually be carried on the operator's books until the logs are sold. Often, indeed, contracts 
are made under whicli part payment is advanced on the scale of the logs in rollways. 



Logging costs are summarized as follows : 

Depreciation of tixed investments (2,80(H-3,500,000) $0.80 

Felling and cutting, by contract . 70 

Swamping . 40 

Brush disposal . 25 

Skidding . 45 

Chuting, draying, and hauling .40 

Tote team .03 

Horse feed . 15 

Blacksmithing and repairs .14 

Decking in rollways .30 

Breaking rollways . 15 

Driving to Kootenai River .30 

General expense, clerk, etc . 20 

Total .- 4. 27 

The current log price for mixed runs of these species on Kootenai River is 
$7.50 " per thousand feet. The cost of driving downstream 25 miles to a large 
going mill, which forms the only available market, and booming is $1 per 
thousand feet. The standard manufacturing cost at this plant, including de- 
preciation on mill and equipment, is $5 per thousand feet, lumber tally. The 

IS In this instance, however, the manufacturers furnish a part of the capital required 
by the loggers, which has the effect of an increase in the log price. 



64 APPRAISING STUMPAGE ON NATIONAL YORESTS. 

iionnal overrun in this timber is 20 per cent. Tliis is reduced, liowever, by 
loss in drivin^i and storji,w, to 12 per cent. 

The average mill-run lumber selling prices are $15 for yellow pine and $12 
for larch and Douglas lir, or for the chance : 

Yellow pine, 76 per cent, at $15 $11. 40 

Larch and tir, 24 per cent, at $12 2. 88 

Average price 14. 28 

Thirty-hve per cent on overturn of logging to the Kootenai River is .leemed 
fair, since success depends uiton the development and use of a diiricult stream 
not previously driven. F'ifteen per cent on the overturn of the n4ain river 
drive and 20 per cent on manufacture are considered equitable. 

Using the overturn formula and a separate rate of profit for logging, driving, 
and manufacturing, the stumpage price is as follows: 

Per M ft. 

Logging costs $4. 27 

Margin, at 35 per cent 1.49 

Driving 1.00 

Margin, at 15 per cent . 15 

Total logging and margin 6.91 

Manufacturing lumber tally $5. 00 

12 per cent overrun .60 

^largin, at 20 per cent 1. 12 

Manufacturing and margin log scale 6.72 

Total cost, stump to f. o. b. cars 13. 63 

Lumi)er value $14. 28 

12 per cent overrun 1. 71 

Selling value, log scale ^ 15.99 

►Stumpage indicated $2. 36 

Using the above stumpage and the prevailing log market, the loggers profit 
woukl be as follows: $7.50— ($4.27 +$2.36) =$0.87 per thousand or about 20 per 
cent on the cost of logging. 

The stumpage values determined from lumber values should govern. Prac- 
tically all loggers in this region are furnished the operating capital for logging 
by the manufacturer or mill man. The manufacturer thus carries a large 
percentage of the risk and is therefore entitled to a reasonable portion of the 
margin. Loggers should for this reason be willing to divide the margin allowed 
on logging with the manufacturer who furnishes most of the working capital. 
This is the reason that the prices actually paid for logs in this region are 
less than the values determined from lumber values. 

The alteiuiative method of determining profit on manufacturing in sales of 
this character is as a percentage of the average investment in the milling plant 
and working capital required to run it prorated over Its total annual cut. The 
average milling Investment in the case discussed may be put at $275,000, with 
an average yearly cut, log scale, of 30,000,000 board feet. A return of 12i 
per cent on this mill Investment may be regarded as equitable. This calls 
for an annual sum for profit margin of $34,375, or $1.14 per thousand feet of 
logs manufactured. In lieu of this figure, a standardized milling profit, found 
by experience to be generally applicable throughout the region, might be used. 



APPEAISING STUMPAGE ON NATIONAL FOEESTS. 



65 



3. A SALE OF TIE AND MINING TIMBER IN WYOMING. 

A chance containing: 60,000,000 feet of lodgepole pine is to be cut out in five 
years. Its products, with their average selling prices delivered at the railroad, 
are as follows : 



Product. 


Amount. 


Per cent 
of stand. 


Average 
price. 


Hewn railroad ties 


518,400 pieces. . . 


27 
54 
12 

7 


1 $0 57 


Sawed ties 


1,036,800 pieces 

720,000 pieces. . . 


60 


Mine props 


30 


Lumber * 


4,200 000 feet 


18 00 









1 90 per cent standard, at $0.60; 10 per cent seconds, at $0.30. 

2 Side lumber only made in cutting sawed ties. 

The operation of the cliance will require the constructiou of 27 miles of flume 
from the timber t(i a rivei- in the main valley below the mountains, down which 
the ties and other products will be driven to a small st(nage and loading yard 
at the railroad. A dam must be built to form a storage reservoir on the sale 
area, into which the timber is delivered by branch flumes, and two additional 
dams to control the supi>ly of water for the reservoir and flunu's. A sawmill 
with a daily capacity of 50,000 feet will be built at the outlet of the reservoir to 
slab or saw the larger logs into ties with a small by-product of side lumber. 

An old freight road running near the chance must i)e repaired and 12 miles 
of additional road built to reach all of the camp sites ; 35 miles of telephone line 
are required, paralleling the flume, to connect the sawmill, headquarters camp, 
and flume camps with the office at the railroad. Unloading ground and storage 
yards at the latter point must be purchased at a cost of approximately $1,000; 
and $1,200 expended for a boom in the river and a jack-chain system to laud 
the ties and other timbers in the yards. Oflice buildings will, however, be rented. 
Horse skidding and sled hauling to th» reservoir or branch flumes will be em- 
ployed exclusively. 

The commissary and store which will be maintained at the headquarters camp 
are not included in the appraisal. (See p. 8.) This enterprise, including the 
construction of the buildings used, the furnishing and hauling of supplies, and 
the employment of a cook and storekeeper, is regarded as distinct from the tim- 
ber sale. The seasons for various parts of the operation are : 

Cutting, June 1 to January 31, eight months. 

Skidding, July 1 to February 28, eight months. 

Hauling, November 15 to March 15, four months. 

Milling, May 15 to October 15, five months. 

Fluming, May 15 to October 15, five mouths. 
The investments necessarv will be tabulated in the usual form. 



Item. 


Initial 
investment. 


Number 

of years 

used. 


Annual 

deprecia 

tion. 


Residual 
value. 


Average 
profit- 
bearing, 
investment. 


27 miles of flume, at $2,500 


$67, 500 
2,000 
2,000 
1,050 
20, 000 
.5,000 
3, 600 


5 
5 
5 
5 
5 

14 


$13, 500 
400 
400 
210 
2, 000 
1,000 
720 




$40, 500 


Main reservoir dam.. . 




1,200 


2 side dams, at $1,000 




1,200 


35 miles of telephone, at $30 




630 


Sawmill 


$10, 000 


16, 000 




3,000 


12 miles of new road, at $300 




1,800 



1 Each of the woods camps and branch roads to them will be in use but part of the total operation. 



66 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



Item. 



Initial 
investment. 



Number 

of years 

used. 



Annual 
deprecia- 



Residual 
value. 



Average 
profit- 
bearing 
investment 



Headquarters camp, stables, etc . . 

Woods camps (4 sets) 

60 teams, at $350 

40 sets draft harness, at $60 

35 sets skidding harness, at $17.15. 

30 logging sleds, at $70 

10 wagons, at $125 

Axes, saws, peavies, chains, etc. . . 

Landing groimd 

Landing equipment 

Working capital ^ 



$2,000 

2,000 

21,000 

2,400 

600 

2,100 

1,250 

3,000 

1,000 

1,200 

102,000 



Total. 



239, 700 



$400 
400 
3,000 
320 
80 
210 
100 
360 



$6,000 

800 

200 

1,050 

750 

1,200 

1,000 

400 

102,000 



$1,200 

800 

15,000 

1,760 

440 

1,680 

1,050 

2,280 

1,000 

880 

102,000 



23,260 I 123,400 



192, 420 



1 Each'of the woods camps and branch roads to them will be in use but part of the total operation. 
' The calculation of working capital is given in detail on p. 68. 

The operating costs for the various products are estimated as follows: 



Item. 



Felling, bucking, hewing, etc 

Brush disposal and cutting defective timber 

Skidding 

Hauling to flume, including cost of temporary roads 

Pluming or driving to miU 

Sawing i 

Pluming and driving to railroad and handUng in yard . 

Maintenance of improvements and equipment ^ 

General expenses ^ 



Total. 



Hewn ties, 
per piece. 



$0. 122 
.030 
.050 
.040 



.035 
.010 
.017 



.304 



Sawed ties, 
per piece. 



$0. 031 
.024 
.031 
.056 
.016 
.055 
.035 
.013 
,022 



Mine props, 
per piece. 



$0. 030 
.010 
.050 
.035 



.025 
.005 
.009 



Lumber 

per 1,000 

feet. 



$1.00 
.75 
1.00 
L78 
.50 
2.50 
1.25 
.422 
.742 



.283 



9.944 



i| No overrun can be figured on account of the large part of the logs cut into ties, which are dealt with sepa- 
rately by the piece, and the inability to flume and market short lengths and low grades. 

2 Under these items there is charged against each product only the expenditures for upkeep of improve- 
ments and equipment, supervision, inspection, office costs, etc., applicable to that part of the operation. 

The annual depreciation will be prorated over the net value of the year's 
cut ; that is, the total margin between operating cost and selling price. This is : 



Product. 




Hewn ties. 
Sawed ties. 

Props , 

Lumber... 



Total. 



The mill depreciation. $2,000, should obviously be borne by the mill products, 
lumber and sawed ties, exclusively. The remaining depreciation, $21,260, is 
chargeable to the entire cut. The depreciation charge for the several products 
is thus determined as follows: 
$2,000 



For the sawmill 
sawed ties. 



$72,500.16 



=$0,028 per dollar of margin on lumber and 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



67 



$21 260 
For other improvements and equipment /; ' =$0,178 per dollar of 

$119,000.04 

margin on the entire cut of all products. 

Depreciation on lumber, per thousand feet $1. 66 

Depreciation on sawed ties, per piece .065 

Depreciation on hewn ties, per piece . 047 

Depreciation on props, per piece .024 

Adding depreciation to the operating costs, the total overturn for the respec- 
tive pi'oducts is : 

Hewn ties $0,351 

Sawed ties .348 

Props . 188 

Lumber .11. 604 

Twenty-five per cent of the overturn is believed to be a fair profit margin for 
hewn and sawed ties. These are contracted in advance in large quantities, are 
always in demand, and involve no market risk. The operation requires, how- 
ever,. an exceptional amount of working capital and is subject to more than the 
ordinary logging risk on account of the possible shortage of water, delays in 
fluming. and hanging up of part of the year's cut. The turn is only once a 
year. A profit margin of 35 per cent is deemed equitable on props and lumber. 
The market for this material is uncertain, and much of it must often be carried 
in the yards for considerable periods before it can be sold. 

The stumpage prices are thus fixed as follows : 



Product. 


Overturn. 


Profit 
margin. 


Selling 
price. 


Stumpage 
rate. 




SO. 351 
.348 
.188 

11. 604 


$0.08775 

.087 

.0658 

4.0614 


$0.57 
.60 
.30 

18.00 


$0.13 




.165 


Props 


.05 




2.33 







The price of sawed ties is equivalent, at the ratio of 32 per thousand feet, to 
a log scale rate per thousand board feet of $5.31. Since both sawed ties and 
lumber are manufactured from logs too large for hewing, their respective prices 
may be averaged in the ratio of 54 to 7 (per cents in the total cut) at $4.97. 

The large amount of working capital required on account of the limited flum- 
ing season adapts this chance to appraisal by the investment method more 
logically than by the overturn method. The need for a large working fund as 
well as considerable money for improvements makes the enterprise primarily 
capitalistic in nature. The requirements of the investment method would be 
met by a return of 20 per cent upon the average profit-bearing investment of 
$192,420. Twenty per cent is regarded as an equitable margin under the risks 
indicated. 

In estimating the working capital for this operation, it is assumed that the 
average date of delivering the year's cut at the railroad is August 1, the 
middle of the fluming season ; and that wages are paid on the 15th of the month 
following that in which the work was done. 

The working funds required for logging must cover cash payments for stump- 
age, labor, horse feed, maintenance, and general expense throughout the cutting, 
skidding, and hauling seasons and carry these payments until the following 
August 1. The various expenditures may be tabulated by dates as follows, the 



68 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



number of months elapsing between eiich payment and the date of delivery 
being indicated : 



Date. 


Stum page. 


Labor. 


Horse feed. 


Mainte- 
nance. 


General 
expense. 


Total. 


Months 
carried. 




$5,000 










$5,000.00 
1, 107. 50 

11,444.27 
8, 625. 79 
5, 000. 00 
8, 188. 29 

19, 125. 79 
7, 125. 79 
5, 000. 00 
8,375.11 
8, 312. 61 

13,312.61 

4,075.84 

545.00 

.545. 00 


14 


15 






$.500 
100 
825 


$607. 50 
545. 00 
545. 00 


ni 


July 15 


5,000 


$4, 299. 27 
5, 755. 79 


$1,500 
1,500 


12i 


Aug. 15 


Hi 


Sept 1 


5,000 


11 


15 


5, 755. 79 
5, 755. 79 
5,755.79 


1,500 


■ 325 


607.50 
545.00 
545.00 


lOi 


Oct 15 


5,000 


7,500 1 325 


9i 


Nov. 15 




825 


If 


Dec 1 


5,000 




8 


15 


7, 542. 61 
7, 542. 61 
7, 542. 61 
3, 243. 34 




225 
225 
225 
225 


607.50 
545.00 
545.00 
607. 50 
545. 00 
545. 00 


Vi 


Jan. 15 






ef 


Feb 15 


5,000 




5i 


Mar 15 




U 


Apr. 15 






H 


May 15 









2i 














Total 


30,000 


53, 193. 60 


12,000 


3,800 


6, 790. 00 


105,783.60 









The labor bills paid on July 15 cover felling, bucking, hewing, etc., and brush 
disposal anl cutting defective trees for one month's cut of each product; that is. 
for one-eighth of the annual cut. The wages paid in August, September, Octo- 
ber, and November cover the same items together with labor charges for one 
month's skidd'ng. In the payments for December. .January, and February, 
labor charges for hauling are included. The March pay roll covers only the 
last month's hauling and skidding. 

The cost of horse feed averages .$l.oOO ])er Tiionth for the eight months while 
skidding and hauling are in progress. It is necessary, however, to tote in the 
winter's supply in September ; hence feed for five months is charged to the Octo- 
ber expenditures. The expenditures for loose feed are included in the skidding 
and lumbering costs given on page 66. 

The payments for maintenance cover the salaries of a blacksmith at .$?.'") per 
month, two assistant lilacksmiths at .$.'50 per month, and a harness maker at $.">0 
per month. These men are employed for eight months. .Tuly 15 to March 15. 
Material for the blacksmith and harness shops costing .$1,000 are also included 
in the payments for maintenance, (me-half on August 15 and one-half on Novem- 
ber 15. together with an expenditure of $1,000 for keeping the flume in repair. 
Five hundred dollars of the latter item are paid on June 15, the rest in install- 
ments of $100 during each of the succeeding 'five months. 

Under "general expense" entries are charged the salaries of a foreman at 
.$200 per month, a bookkepeer at the headquarters camp at $100. and a general 
agent and bookkeeper at the railroad yards at $125. These are year-round men 
paid off on the 15th of each month. Other items charged to general expense are 
the premium on a $20,000 bond, amounting to $250 annually, paid in quarterly 
installments, beginning June 15; rent for the office at the yards, at $20 per 
month ; and $100 per month to cover miscellaneous items such as selling lumber 
and props, check scaling, etc. 

By multiplying the expenditure in each month by the number of months until 
date of delivery and dividing the sum of these products by 12, the average 
working capital required for logging operations is found to be $80,176.53. 

Expenditures for milling, fluming, and driving are incurred during the five 
months" season from May 15 to October 15 ; and average as of August 1, the 
average date of delivering the year's cut at the yards. On August 1, therefore, 
it can be fairly assumed that all milling, fluming, and driving charges have been 
paid, in addition to the stumpage and logging costs enumerated above. That is, 
nil amount of working capital equivalent to the total annual expenditure for 



APPBAISING STUMPAGE ON NATIONAL, FORESTS. 



69 



stumpage and operating costs is on that date invested in the year's cut. This 
amount is readily obtained for each product from the operating costs given 
on page 66 and the stumpage prices on page 67, as follows : 

For hewn ties $44. 997. 12 

For sawed ties 92.897.28 

For props 30,816.00 

For lumber 10.310.16 

Both I^inds of railroad ties will be sold and paid for witliin an average of one 
month after delivery. It is not probable that payment for props and lumber, 
however, will be received in less than an average of three months. A yearly 
fund of working capital equivalent to one-twelfth of the total cost of the rail- 
road ties and one-fourth that of the other products is therefore needed to carry 
yard stock from date of delivery to date of sale. This amount is $21,772.74 
which, added to the working capital used in logging, makes the total for the 
operation, $101,949.77. 

AN EXAMPLE OF THE INVESTMENT METHOD FOR LOGGING AND 
OF THE OVERTURN METHOD FOR MILLING. 



A FLUME ANn DRIVING CHANCE IN THE WESTERN WHITE PINE REGION. 

This chance is estimated to cut 49,000.000 feet under the standards for 
marking in this type and region. 

The chance is figured as a o-year operation, and for convenience in the ap- 
praisal the annual cut is rounded off to 30,000,000. The timber consists of 
the following species : 





M feet. 


Per cent. 


White pine 


39, 200 
9,800 


80 
20 


White fir 


Total 


49,000 


100 





The chance, from a topographic point of view, is well suited to a railroad 
operation. The grade of the main stream varies from; 2 to 4 per cent, and 
many of the side draws would permit of railroad construction and operation. 
Railroading would reduce the amount of chuting because the spurs could be 
constructed farther up the tributaries than a flume could be. The chance, 
however, is located about 20 miles from a railroad, and for that reason rail- 
roading is not considered practicable. The most feasible method of operation 
is fluming, but the operation of the flume on the tributaries is limited by the 
volume of water. 

The creek on which this chance is located empties into a fairly good driving 
stream. Logging begins about May and is generally discontinued in the latter 
part of November. The drive starts in the latter part of April or first of 
May, and the logs reach the mill some time in May or June. There is con- 
siderable timber on the face of the chance which can be chuted directly into 
the river. This material can be logged while the first portion of the flume is 
being constructed. 

The general logging conditions are unfavorable; the slopes are very steep; 
the skidding distances long, and timber rather small. Logging will therefore 
be very difficult and unusually expensive. The supplies will be freighted by 
auto track a distance of about 26 miles, then transferred to wagons and 
hauled from 5 to 8 miles to the camps. 



70 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



The following tabulations show the estimated average annual profit-bearing 
investments in logging, the average annual depreciation, the depreciation and 
the margin for profit and risk per M feet, based on a rate of 20 per cent on 
all of the investment except stumpage payments and brush disposal. A. 
margin of only 10 per cent is allowed on money invested in stumpage and 
brush disposal. 



Item. 



2 miles of flume, at $8,000 

3 miles of flume, at S8,000 , 

1.62 miles of flume at $8,000 

3 dams 

2 dams 

Do 

2 camps , 

Do 

3 camps 

2 miles of wagon road , 

3 miles of wagon road , 

1.62 miles of wagon road 

1 sawmill 

20 teams, at $650 

Bunkhouse equipment 

Cookhouse equipment 

Small tools • 

1 warehouse and camp 

Warehouse equipment 

4 freight wagons , 

Blacksmith outfits , 

B lacksmith supplies 

3 auto trucks 

2 small donkeys 

Ijnes, blocks, etc 

Do 

Do 

Cookhouse supplies 

Barn supplies— hay, oats, etc 

Working capital, excluding brush disposal 
and payments , rounded off to ^ 

Total 



Initial 
cost. 



$16,000 

24,000 

12, 960 

19,000 

2,900 

3,150 

8,500 

8,000 

14,000 

4,000 

6,000 

3, 240 

3,000 

13,000 

7,000 

3,000 

15,000 

2,500 

1,000 

1,000 

1,000 

2 3,000 

12,000 

6,000 

4,200 

4,200 

4,200 

2 7, .500 

23,000 

100,000 



312,350 



Years 



Per- 
centage 
deprecia- 
tion. 



20 
33§ 
50 
20 
33J 
50 
20 
33J 
50 
20 
335 
50 
10 
20 
20 
20 
100 
20 
20 
20 
20 



Average 
annual 
deprecia- 
tion. 



Residual 
value. 



$3, 200 

4,800 

2,592 

3,800 

580 

630 

1,700 

1,600 

2,800 

800 

1,200 

648 

300 

2,600 

1,400 

600 

3,000 

.500 

200 

200 

200 



2,400 
600 
840 



38,450 



None 

None 

None 

None.... 

None 

None.... 
None..., 

None 

None 

None 

None 

None 

$1,500 

None 

None 

None.... 
None.... 

None 

Nonie.... 

None 

None 

3,000 



Averse 
annual 
profit 
bearing 
invest- 
ment. 



$9,600 

9,600 

3,890 

11,400 

1,160 

950 

5,100 

3,200 

4,200 

2,400 

2,400 

970 

2,400 

7,800 

4,200 

1,800 

3; 000 

1,500 

600 

600 

600 

3,000 

7,200 

4,800 

1,260 

1,260 

840 

7,500 

3,000 



3,000 
None.... 
None... . 
2,100 
7,500 
3,000 



100,000 100,000 



120, 100 



206,230 



1 There will be four replacements, one at the beginning of each year. If the formula were used forthesmall 
tools, it would show five purchases of $3,000 each, or a total initial investment of $15,000. For each pur- 
chase, however, the average annual depreciation and the average annual profit-bearing investment would 
be the $3,000. The results for the five investments would be the same as the results shown on one line. 

' Average on hand all the time. 

3 The average time that the money is tied up in logs was determined as follow: The cut for each month 
on a similar chance in this region was known, and tiie average cut per month on this chance was assumed 
to be the same proportion of the annual cut. The monthly cut multiplied by the number of months from 
the time the logs are cut imtil they reach the mill shows the number of months that the money is invested 
in 1,000 feet of logs. The products were added, and the sum divided by the annual cut. This gave the 
weighted time that the working capital in the logging operation is invested in logs. The method is shown 
in the following table: 



Month when cut. 



May 

.Tune 

July 

August 

September. 
October . . . 
November. 

Total 



Amount 
cut. 



Mfeet. 
■ 500 
1,000 
1,500 
2,000 
2,500 
2,500 
1,000 



11,000 



Time till 

logs reach 

mill. 



Months. 
13 
12 
11 
10 



Thou- 
sand fe et 
months. 



6,500 
12,000 
16,500 
20,000 
22,500 
20,000 

7,000 



104,500 



104,500 
11,000 



=9.49 months, the average time that the money is tied up in the operating costs of logging. 



This was rounded off to 10 months in this appraisal. 



APPEAISIXG STUMPAGE GIST NATIONAL FORESTS. 71 

The working capital was determined as follows : The operating cost of logging, exclud- 
ing brush disposal, is $11.27 per 1,000 feet. The annual cut Is estimated to be 10,000,000 
feet. The total expenditures for operating costs, not including brush disposal, is there- 
fore $112,700. The money is tied up 9J months, as is shown in the preceding table. 
This is rounded oflf to 10 months. The average investment in working capital for 

ei 1 •> 700 10 
operating costs of logging is ^ — p^— ^Xp^=?93,916. The cost of driving, sorting, and 

booming is estimated to be $2 per 1,000 feet, and the money is tied up about two 
months, making an average annual investment of about $3,300. A few logs will hang 
up on the drive and lie over until the next year. The total average Investment in work- 
ing capital, excluding brush disposal and stumpage payments, is summarized as follows: 

Operating costs $93, 916 

Driving 3, 300 

Logs left on drive till next year 3, 000 

Total 100, 216 

For loggiug, the margin for profit and risk and the depreciation are com- 
puted as follows: 

Investment in equipment, improvements, and worliing 

capital used in logging $206,230.00 

Margin, at 20 per cent 41,246.00 

Margin per M feet a cut of 10,000 M feet $4. 12 

Investment in stumpage payments and brush dis- 
posal" 40,000.00 

Margin, at 10 per cent 4,000.00 

Margin per M feet . 40 

Depreciation 38, 450. 00 

Depreciation per M feet 3. 85 

The total charges against the logs, exclusive of stumpage. but including the 
profit margin computed by the investment method, is as follows: 
Current improvements, including chutes, skidways, and land- 
ings $1. 27 

Sawing 2. 00 

Swamping, skidding, and landing 4. 35 

Chuting 1.65 

Fluming . 80 

Brush disposal . 80 

Maintenance . 20 

Administration 1. 00 

Driving, sorting, and booming 2.00 

Depreciation of investments 3. 85 

Margin for profit and risk 4. 52 

Total cost, stump to mill, including margin 22. 44 

The lumber-manufacturing industry in this region produces a highly finished 
product with well-defined manufacturing processes and type of mills. Standard 
costs for manufacturing are therefore readily obtainable and satisfactory for 
use in making appraisals. The average manufacturing costs for the mills of 

" There is practically no risk involved in money tied up in stumpage. The brush dis- 
posal will be handled by the Forest Service under a cooperative brush-disposal fund, and 
this part of the Investment is also subject to very little risk because the cost of brush 
disposal can not exceed the specified amount per thousand feet. For these reasons the 
money invested in stumpage payments and for brush disposal is believed to be entitled 
to only one-half as much margin as the rest of the working capital. Stumpage is placed 
at $4 per 1,000 feet, and brash disposal is estimated to cost 80 cents per thousand feet. 
Based on an annual cut of 10,000,000 feet, the average annual investment represented by 
brush disposal and stumpage payments is $40,000, using 10 months as the average time 
the money is tied up. 



72 



APPBAISING STUMPAGE ON NATIONAL FORESTS. 



the type, which shoiihl logically dbtuiii the lojrs from this sale, Vjused on the 
previous three years of operation, are $11.50 per thousand feet of lumber, in- 
cluding depreciation. This lias been accepted as standard. The investments 
in manufacturing are lieavy, and rates of margin for profit and risk of 25 
per cent and 20 per cent under the overturn method are known to be equiva- 
lent to rates of about 15 per cent and 12 per cent, respectively, under the in- 
vestment method. The number of turns per year average about three. Under 
these conditions a rate of profit-margin of 20 per cent <m the ovei-turn, using the 
standard co.sts. is considered equitable. 

Tlie overrun, after deducting 5 per cent loss on the drive is 15 per cent. The 
total charge for manufacturing, including profit-margin, is therefore figured 
as follows : 

Manufacturing and depreciation $11. .50 

15 per cent overrun 1. 73 

13.23 
Margin for profit and rislv at 20 per cent 2. 65 

Total 15. 88 

The average selling values during tlie past tliree years are: 



White pine. 



White fir. 



Selling value 

15 per cent overrun 

Selling value, log scale 



$39. 00 
5.85 



$30. 
4.50 



The first calculation of stumpage vahies is as f()lh)ws : 



White pine. 



White flr. 



Selling value, log scale 

Logging and margin 

Manufacturing and margin 
Total cost and margin 

Stumpage indicated. 



$22. 44 
15. 88 



38.32 



S22. 44 
15.88 



.?34. 50 



-3.82 



Placing the minimum stumpage value of 50 cents on white fir, tlie total 

deficit is $4.32 per tliousand feet. The removal of white fir to the extent of 20 

per cent of the total cut is required for silvicultural reasons. Tlie :i mount to 

reduce the white pine price to carry the loss on the white fir is determined 

20 X 3 82 
thus: '" „ P-' — ^approximately $0.96 to reduce the white pine. Tlie stumpage 

values then become : 

Per M feet. 

White pine .$5.87— 0.9G=$4.91 

White fir .50 



APPENDIX. 



FORM FOR SUMMARIZING THE ESSENTIAL DATA IN STUMPAGE 

APPRAISALS. 

The use of tlie foUowinfi' siuniDar.v in outline form is desirable to present 
co)icisely the more essential features of the appraisal. This summary should 
be prefixed to all reports submitted to the Forester : 

1. The sale area. 

(1) District, Poorest, main watershed or other descriptive location, desig- 

nation of sale or chance. 

(2) Area covered by appraisal (acres). 

(3) Distance from chance to common carrier, or local market, by pro- 

proposed loggingc road, fliurae, drivable stream, etc. (method of 
transportation and miles). 

(4) The stand: 

a. Total estimated cut (thousand feet). 
h. Name and per cent of each species. 

c Kind and per cent of each product to be cut (saw logs, ties, mine 
props, etc.). 

2. Investments. 

(1) Name main units (railroad or flume with length, sawmill with ca- 

pacity, etc. ) . 

(2) Average fixed investment. (Profit-bearing.) 

(3) Annual depreciation. 

(4) Average working capital. 

(5) Total average investment in operation. 

3. Cost of production (per thousand feet log scale, piece or other unit; sepa- 

rately by species or products as required). 

( 1 ) Depreciation. 

(2) Logging. 

(3) IManufacture. 

(4) General expense. 

i^) Forest Service requii'ements. 

(6) Total. 

4. Profit margin. 

(1) Estimate of risk (low, average, high). 

(2) Method used (investment, overturn, pay for personal services). 

(3) Rate. 

(4) Profit in dollars and cents (per thousand feet log scale or other unit 

of output). 

5. Selling price (per thousand feet log scale, piece, or other unit; separately 

by species and products as required). 

6. Keconunended stumpage price (per thousand feet, log scale, piece, or other 

unit; separately by species and products as required). 
7 Important contract terms. 

(1) Cutting period. 

(2) Construction period. 

(3) Other terms which materially influence the appraisal. 



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